The Five Factors that Determine Your Credit Score [Complete Guide]

By: Yara Pollard

The use of credit cards have become so prevalent. So much so that the average American has four credit cards. This is according to Experian, a multinational consumer credit reporting company.

More and more people are using credit cards yet a lot of cardholders have the wrong idea about credit scores. Some don’t even know the impact of having a low credit score. Here are shocking statistics from CNBC:

  • Just around 20% of people understand that credit score determines interest-rate charges.
  • Around 40% of people have a misconception that age and marital status are factors that determine their credit score.

Not knowing enough about credit can put you in a major disadvantage. For example, with a low credit score, you can end up paying $5,000 or more on a 60-month car loan worth $20,000 than an individual with a high credit score. That’s just one example.

Imagine how much you could lose in total with a low credit score. By knowing how disadvantageous a low credit score is, you need to know how to improve it. In doing this, you need to know the five factors that affect your credit score. 

By knowing the foundation, you can better understand the practices of how to improve your credit score. For this article, we’ll share with you the five factors that determine FICO scores. FICO is just a type of credit score.

There isn’t just one type of credit score. There are a handful. Here are other types of credit scores:

  • Experian
  • Equifax
  • TransUnion
  • Vantage Score

We chose FICO score for this article because it is the most used type of credit score by US lending institutions. In fact, according to FICO, “the FICO® Score is used by 90 of the top 100 largest US lending institutions for their risk assessment needs.”

Here are the five factors that determine FICO scores:

  1. 35% – Payment History
  2. 30% – Credit Utilization
  3. 15% – Length of Credit History
  4. 10% – New Credit
  5. 10% – Credit Mix

Payment History

Payment history is the largest chunk among all five. 35% of your credit score is determined by your payment history. By being diligent with your payment, you can improve your credit score. 

Meanwhile, missed or late payments can do the opposite. Payment history is the biggest factor because lenders look at your credit score to see if you are a lending risk. That’s why those with low credit scores have fewer credit options and higher interest-rate charges. 

By having a good payment history, you are rewarded with more credit options, lower interest-rate charges and it can be easier to have a high credit score. This is understandable as lenders want to do business with people who know how to manage their finance.

There are a lot of advantages with using credit cards. All of which you can make use of and more if you have a good or a high credit score. Again, to ace your payment history, pay on time and never miss or make late payments. This is also one of the best ways to boost your credit score.

Credit Utilization

Credit utilization comprises 30% of your credit score. Notice how just the first 2 components make up almost two-thirds of the credit score. Credit utilization is the amount of credit you’ve used or borrowed. 

The rule of credit utilization is to just have a low credit balance. FICO views people with high credit balance and often maxed out credit cards as individuals who can’t handle their debt well. 

This is why it’s important to have a threshold to attain or keep a high credit score. A lot of people use the 30% credit utilization rule. It’s to keep your credit balance below 30% of your available credit. 

Length of Credit History

Length of credit history is how long you’ve had your credit card and the length of time since your account’s recent transaction. This is why it’s important to apply for a credit card early on and to keep old credit cards.

Don’t follow the trend of cutting credit cards just because of the temptation of using them. Remember that credit cards are just financial tools and they are meant to serve you. You should be the one under control and not the other way around. 

Know more about credit card do’s and don’ts. Don’t just follow what most people are doing because of emotions. It can save you from having problems and regrets. 

New Credit

Having a new credit line accounts for 10% of your total credit score. However, this doesn’t mean that applying for multiple credit lines at the same time can boost your credit score. In fact, it may do the opposite.

According to Tommy Lee, principal scientist at FICO, “we encourage consumers to apply for and open new credit accounts only as needed.” He also mentioned how new accounts will lower your average account age. This has a significant impact on your credit score if you don’t have a lot of other credit details. 

Credit Mix

Credit mix is having a variety of debt products and makes up 10% of your credit score. According to FICO, borrowers with a good mix of installment loans and revolving credit show that they are less risk of lenders. 

Lee also said, “ people with no credit cards tend to be viewed as higher risk than people who have managed credit cards responsibly.” Have a good credit mix to further improve your credit score.

You can make use of store credit cards such as the Target Red Card to have more credit variety. Also, know more about other types of credit cards. They can help you have a good credit mix to boost your credit score.

Now that you know the five factors that determine your credit score, you can better understand and know what to do and what not to do to attain and keep a high credit score. 

Remember these five factors and share this knowledge with your family and friends so they can also know more about credit scores. You can read more articles about credit and credit cards in our website. Navigate through our page to learn more. 

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