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How Your Credit Score Is Determined

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Illustration for article titled How Your Credit Score Is Determined

Photo: Elena Scotti (Shutterstock)

When most people talk credit scores, they’re talking about your General FICO score—the one lenders are most likely to use. FICO is tight-lipped about the formulas they use to calculate our scores, but we know the general categories they track and how important they are to that calculation. Here are those categories, and what you need to know about them.

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Payment history is 35% of your score 

Your payment history makes up 35% of your score and it’s pretty much what it sounds like: your history of paying debt in full and on time. The way FICO sees it, this history is a good indicator of how well you handle debt in general. According to CreditCards.com, your payment history is based on seven main factors:

Payment information on various types of accounts, including credit cards, retail accounts, installment loans and mortgages.

The appearance of any adverse public records, such as bankruptcies, judgments, suits and liens, as well as collection items and delinquencies.

How long overdue any delinquent payments have become.

The amount of money still owed on delinquent accounts or collection items.

How much time has passed since any delinquencies, adverse public records or collection items.

The number of past due items listed on a credit report.

How many accounts are being paid as agreed.

FICO determines all of this by analyzing your credit report (which is why your report is far more important than your score). It’s not easy to know when a late payment will pop up and affect your score, as there are no set rules for when creditors have to report late payments. Some might not report your missed payment for 60 days, while others will report it after 30. You can always check your credit report to ensure there are no payments outstanding, but generally, if you have a history of on-time payments, you should be in the clear.

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Credit utilization is 30% of your score

Credit utilization is the amount of credit you have available to you that you’re actually using. This percentage—available credit to used credit—is called your credit utilization ratio. For example, a $1,000 purchase on a credit line of $10,000 gives you a credit utilization ratio of 10%. The lower your utilization, the better your score (except for 0% because it doesn’t give lenders a credit history to scrutinize) and experts say you should not have a ratio higher than 30%.

Because your credit limit is part of the credit utilization equation, closing an old credit card can sometimes work against your FICO score. That said, people still choose to close old cards and get dinged on their score rather than pay an annual fee for a card they don’t even use. However, it’s best to avoid cancelling credit cards just before applying for a mortgage or any other line of credit.

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Some credit experts suggest opening a bunch of cards to boost your score. Even though it sounds counterintuitive and risky (the temptation to spend!), raising your overall credit limit indeed boosts your FICO score because of credit utilization. Just remember that good financial habits are more important than a credit score.

Some people will tell you it’s important to revolve a balance to build credit, but experts agree: that’s a myth. Credit card analyst Jeanine Skowronski said it best at Forbes:

“You absolutely, positively don’t have to carry a balance,” says Skrowronski, who recommends paying your credit card on time and in full each month. The only thing you’re doing by carrying a balance is paying interest — and with the average national interest rate at 15% that can add up quickly.

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Length of credit history is 15% of your score

The length of your credit history doesn’t make up a huge portion of your score, but it’s still important. According to CreditCards.com, this is the “length of time each account has been open and the length of time since the account’s most recent action.” Here are three main factors that affect your length of history:

  • How long your accounts have been open overall.
  • How long certain types of accounts have been open.
  • How long it’s been since you’ve actually used those accounts.

This factor makes it impossible to have a perfect credit score if you’re new to credit, as you need credit on your report for at least six months to begin generating a history. FICO wants to see a long history of credit usage so they can gauge your long-term financial habits.

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New credit and credit mix are 10% each

New credit and credit mix are two different factors. With new credit, FICO is looking at a few different things:

  • How many new accounts you’ve opened in the past 6-12 months: “If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your FICO Scores if you don’t have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your FICO Scores,” says FICO.
  • Recent inquiries: An inquiry is when a lender pulls your report to check it. It doesn’t have a huge impact on your score though, and the activity will usually drop off of your report after two years. Plus, FICO only looks at inquiries from the past year.
  • How long it’s been since you opened a new account: According to FICO, your score “may consider the time that has passed since you opened a new credit account, for specific types of accounts.”
  • How well you’ve bounced back from past payment problems: “Late payment behavior in the past can be overcome; re-establishing credit and making payments on time will raise a FICO score over time.”

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Credit mix is kind of vague, but essentially it means that a history of different kinds of debt is good for your score. FICO says that borrowers with a good mix of credit—cards, car loans, mortgages, student loans—are usually less of a risk to lenders. FICO says:

“The credit mix usually won’t be a key factor in determining your FICO Scores—but it will be more important if your credit report does not have a lot of other information on which to base a score.”

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While there are other credit scores out there, most lenders rely on FICO, and even if they don’t, the scoring models will use similar factors. Keeping tabs on your FICO score should give you a good gauge on your credit worthiness in general.

This story was first published in 2017 and was updated on October 22, 2020 with more current information.

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