How your credit score is calculated

Credit score report on desk

A good track record using credit can really help you achieve and maintain a good credit score. That number shows potential creditors how likely you are to repay your debt. This is why knowing the components that make up a credit score is only part of the big picture. Understanding those good activities that impact each component is also how you improve your score. Here are the parts that make up your credit score.

Payment history: 35 percent

Your score factors in your payment history on current and past accounts, as well as any public record and collection items. A few late payments may not ruin your score, but your credit score could drop by as many as 60 up to 110 points. Public record and collection items (e.g. bankruptcies, foreclosures, lawsuits, etc.) are more serious and can create an even larger decline in your score.

How actions impact credit scores

Action   Score Impact
Pay bills on time Improve
Use small portions of credit limits Improve
Obtain a diverse range of loan products Improve
Apply for a new loan Small drop
Establish a new loan account Small drop
Max out credit cards Drop
Pay late – first time Drop
Pay late – frequently Larger drop
Miss 3 payments or more on same loan Larger drop
Charge-off Major drop
Foreclosure Major drop
Bankruptcy Maximum drop

Amounts owed: 30 percent

Your credit score looks at your overall debt and credit use — the ratio of your credit balance to your credit limit. If your balance is $250 and your limit is $1,000, your ratio is 25 percent. Experts suggest keeping it below 30 percent. Keep in mind your score considers both the credit usage percentage rate for each account separately and the percentage rate of all cards combined.

Length of credit history: 15 percent

Your credit score considers how long your accounts have been open and how long since your accounts have had activity. This can be tough when age and experience come into play. It takes at least six months to generate a credit score, so waiting to build credit can be a long process. Additionally, your score calculates the age of your oldest account, newest account and the average age of all accounts. This is why it could hurt your score to close old credit cards.

New credit: 10 percent

Opening multiple accounts in a short span of time represents greater risk. This can be difficult for people who have no credit or those who may be in the market for an auto loan, higher credit limits or a mortgage. Either way, it's important to be strategic when shopping for a new loan or credit card since you don't want your report to show you're constantly applying for credit.

Opening multiple retail credit cards can also ding your score. The additional 20 percent off your purchase can be tempting, but the extra discount may not be worth it if you open multiple new accounts. That could lower your credit score.

Credit mix: 10 percent

Your credit score also considers the different types of credit accounts you have: credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Ideally, you want a mix of revolving and installment credit to show you can handle both. Revolving credit is credit that does not have a fixed number of payments, like a credit card. Installment credit, such as an auto loan, does.

These days, if you have a Home Equity Line of Credit (HELOC) or even a credit card, many financial companies will provide your credit score for free. Be sure to keep an eye on that number.

The advice provided is for informational purposes only.

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