How is a Credit Score Determined?

Do you know what goes into your credit score? Do you know what effect a late payment will have on your scores? Do you know if closing your old accounts will raise or lower your score? Do you know if applying for new credit cards lowers your scores? In this article we will take a few moments to discuss how is a credit score determined.

Usually when we talk about credit scores we mean a FICO score. There are five main factors that make up your score.

The biggest factor of your score is your payment history which accounts for 35% of your number. If you pay your bills on time every time you will have a good credit score.

The next biggest factor is the amounts owed which accounts for 30% of your score. You do not want to max out all your credit cards or else you will have a bad credit score. Do not charge anything and everything to your credit cards, use your debit card instead so that you do not go into debt and lower your FICO scores.

The length of your credit history takes up the next 15% of your score. The older your accounts the better. Do not close your old accounts because this can actually lower your score. Why would you want to wipe out your good payment history? You need to have accounts that are 10 to 15 years old and longer.

The types of credit accounts you have take up the next 10% of your FICO. This is called your credit mix. It helps if you have several different types of loans on your profile. Examples include home and auto loans, credit cards, installment loans, and even student loans. A good mix shows that you are a responsible borrower and can manage your finances will over the short and long-term.

The last 10% of your FICO is for new credit. If you already have five credit cards, do you really need a sixth one? You want to keep your new credit applications to a minimum to avoid lowering your scores.

Now that is how a credit score is determined. And the best way to make sure you have high scores is to pay all your bills on time, keep your debts to a minimum, and establish a long account history. This will account for 80% of your score. Do this and you will be off to a great start.

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