The Five Factors That Calculate Credit Score

Determining your credit score is often a mystery! Calculating with exactness has become a multi-million dollar business with dozens of companies vying to provide credit scores to American consumers, usually at a cost. This article is not for the purpose being able to specifically compute one’s individual score, but rather understand what goes into a credit score, so action can be taken to improve one’s credit, and ultimately buying power.

Payment History:  35%

If there is one single factor that boosts or destroys credit score, it is paying debts on time. As much as lenders want to be paid back in full (with interest), they want to be paid in a timely and predictable manner. Those who pay with consistency, regularity, and promptness simply receive better scores. It is important to note that a few uncharacteristic late payments will not obliterate a score; likewise a list of 100% on-time payments does not guarantee a perfect score.

Action Item: Do everything in your power to pay before the due date. If you can’t, or a missed payment has occurred, at least try to space them out so the mispayments appear out-of-the-norm, rather than patterned.

Amount Owed:  30%

An easy assumption to make is that if large amounts of money are currently owed, the individual who carries them must have a lower credit score. However, there is an important distinction to be made: lenders tend to care more about the ratio of used credit to available credit. A maxed out credit card has all of its credit in use, with little or none available. Even if the dollar amount owed on a card is large, the more available credit, the better.

Action Item: One maxed out credit card is worse than two cards used half way. Avoid situations where all of your available credit has been used; that shows lenders that you carry a higher chance of not paying on time, per Payment History section.

Credit History Length:  15%

One of the more simple calculations, those who have effectively used credit longer show a lower risk of non-payment. As you may be noticing, just about every aspect of credit refers back to the ability to pay in a timely and complete matter. Although an individual can certainly have good credit even if their experience is limited, the longer one uses credit well, the better.

Action Item: Be aware this works in both directions. Good credit + time = Great credit. Bad credit + time = Worse credit.

Credit Types:  10%

One of the most common errors made in attempting to boost credit scores is opening new types of credits just to show experience or competence in using multi-faceted credit. Word to the wise: do not open any credit methods or accounts that aren’t intended for genuine use; it’s a recipe for disaster.

Action Item: Credit cards and installment accounts (car payments, mortgages, etc.) are the most credible credit types.

New Credit:  10%

One of the loudest alarm bells for poor handling of credit is the opening of multiple credit accounts in a short period of time. Studies have been ran on this topic, and the results clearly dictate patterns of irresponsible spending and inability to pay debts back promptly. Applying for new credit hurts ones score a marginal amount, but applying for multiple credit venues in a hurry have a stronger effect.

Action Item: Even if the use of credit will be responsible, don’t apply for multiple credit accounts at one time.