We all know how consequential our credit scores are, but most people don’t understand how exactly it is that their scores are calculated. Fully understanding the factors that determine your score–and to what extent–can help you to keep it in tip-top shape, now and in the future.
Your Credit Score by the Numbers: Percentage Breakdown
- Payment History: 35%
- Level of Debt: 30%
- Age of Credit History: 15%
- Types of Credit (Credit Mix): 10%
- Credit Inquiries: 10%
Your Payment History
Paying all of your bills on time, every time, will have a more positive effect on your credit score than anything else. Conversely, making late payments or missing payments altogether can wreak significant havoc on your score. Charge-offs, collection, bankruptcy, repossession, and/or foreclosure–consequences which can result from serious payment issues–can completely tank your score and render it nearly impossible for you to be approved for anything that requires good credit (e.g. credit cards, auto loans, mortgages, even cell phone plans). A damaged credit score can cost you in ways that you might not even think of, such as increased insurance premiums. Set up payment reminders or automatic bill pay through an online banking portal, such as OTIS Online, to reduce the chance that you will forget to pay on time.
Your Level of Debt
Having high credit utilization ratios (the ratio of your credit card balances to your credit limit) is a sure-fire way to lower your credit score. Aim to keep your utilization below 30%. Try to make payments throughout the month rather than all at once at the end of the month to keep balances low. You may also want to consider requesting that your credit limits be increased to lower your ratios, though proceed with caution: doing so may result in “hard” inquiries which can ding your score. Your overall debt and the relation of any loan balances that you may have to the original loan amounts are also factors that are considered in credit scoring calculations.
Your Age of Credit History
Age of credit takes into consideration both the age of your oldest account and the average age of all of your accounts. The “older” your credit age, the better this is for your score: it demonstrates that you have a history of responsibly handling credit over time. Beware of opening new accounts, especially multiple new accounts at once, as this will lower the overall age of your credit history (and, as previously mentioned, opening new accounts can result in credit-dinging hard inquiries).
Your Types of Credit (Credit Mix)
The two types of credit accounts that are factored into determining credit scores are revolving credit accounts and installment credit accounts. Revolving credit accounts include credit cards and home equity lines of credit (HELOCs); payments can fluctuate monthly based on how much credit the consumer chooses to utilize. You are not borrowing a lump sum when you use revolving credit, but instead are borrowing on an as-needed basis. Installment credit accounts have a fixed number of payments that an individual must make to pay off an agreed-upon amount; there are clear terms, and when your balance is $0, the account is closed. Installment credit includes auto loans, mortgages, student loans, and personal loans.
While revolving credit is considered riskier than installment credit, it is advantageous to your score to responsibly utilize both types: it demonstrates that you can manage various kinds of credit.
Every time you apply for any kind of credit, a “hard” inquiry will appear on your credit report reflecting this action (note that checking your own credit score does not constitute a “hard” inquiry). While inquiries are only 10% of the formula which determines your credit score, several inquiries within a short period of time can be damaging. Any “hard” inquiries made within the previous 12 month period will be factored into your credit score; after 24 months, inquiries will no longer appear on your credit report.
Factors Which DO NOT Affect Your Credit Score:
- Marital status
- Your salary
- Bank overdrafts (unless left unsettled and sent to collections)
- Utility and cell phone payments (unless unpaid and sent to collections)
- Rent payments (unless your landlord reports delinquency to a credit agency)
- Child support and/or alimony payments (unless a collection agency has to become involved due to delinquent payments)
- Insurance payments
- Employment status
- Debit/prepaid card usage
- Your age
- Self-checks of your credit report
- Credit counseling