If you’re trying to improve your credit score, it’s important to understand how your credit score is calculated. While you have many different credit scores, including VantageScores, about 90% of lenders will ask for your FICO score when you apply for credit.
There are even different versions of FICO scores, but in general, there are five factors that make up a FICO score. If you pay attention to these factors and score high, chances are you’ll score well with other scoring versions as well.
Before jumping into the details of each factor, let’s start with a solid understanding of what a credit score measures and how lenders use the score.
What does a credit score measure?
Basically, your score is a three-digit number that reflects your creditworthiness. FICO scores range from 300 to 850. The higher your score, the less risky you are to lenders.
These are the FICO score ranges:
- Exceptional: 800-850.
- Very good: 740-799.
- Good: 670-739.
- Fair: 580-669.
- Poor: 300-579.
When you apply for a credit card, for example, the lender will ask for your score. Your score, along with your card application and credit report, helps the issuer determine whether to approve or deny a credit card.
It’s important to know your credit rating so you don’t apply for credit cards you’re unlikely to get. For example, if your credit score is 700, you have a good score. But if you apply for a credit card that requires very good or exceptional credit, you probably won’t be approved.
How credit scores are determined
Your credit score is generated by an algorithm that uses information contained in your credit report at one of the major credit bureaus. By the way, lenders don’t always report your credit history to the three major bureaus. That’s why your score may vary from office to office. Not only that, but different sheet music versions can also produce a different sheet music from the same office.
Your FICO score is made up of these five factors:
- Payment history: 35%.
- Amounts due: 30%.
- Length of credit history: 15%.
- New credit: 10%.
- Credit mix: 10%.
Payment history: 35%
Your payment history has a big impact on your credit score. Pay all your bills on time and you’ll be laying the foundation for a great credit rating. Be sure to set up a structure, like text or email reminders, so you don’t fall behind on payments. Seriously, one late payment can drop your score like a rock.
And I’m not just referring to credit card payments. Pay all your bills on time. Without exceptions!
Amounts owed: 30%
Amounts owed also have a big impact. You have a credit utilization ratio, which is the amount of credit you have used compared to the amount of credit you have available. If your ratio exceeds 30%, it will likely lower your credit score.
Keep in mind that the FICO score algorithm looks at your rate for each credit card, as well as your overall utilization rate. So don’t try to load a card with debt and hope your overall ratio will keep your score intact. Keep track of the individual proportion of each card to keep a good score.
Length of Credit History: 15%
If you’ve used credit responsibly over a long period of time, that certainly helps you appear creditworthy in the eyes of a lender. But that doesn’t mean he can’t have a good score in the early years of his credit life. You can focus on other factors, like making payments on time and keeping utilization rates low.
Remember, a good score comes from practicing great credit habits. Start using credit responsibly early on and you’ll get a great score.
New Credit: 10%
There are two different types of inquiries that can appear on your credit report: hard inquiries and soft inquiries. When you apply for a new credit card (or other types of credit), the lender will dig into your credit report to determine if a credit card should be approved. This results in a comprehensive inquiry, which means your credit score may drop as much as five points.
With a smooth query, your score is not affected. You have probably received pre-approval letters from credit card issuers. These letters are the result of gentle research. The lender looks at your report at a superficial level to determine if you might qualify for one of their credit cards. This is an example of a soft query.
But if you apply for the card and the issuer takes a closer look at your report, it becomes a difficult query and affects your score.
Credit mix: 10%
You’re also somewhat rewarded for being able to handle different types of credit, including revolving credit, installment loans, and open credit.
Credit cards are an example of revolving credit. You have a credit limit with a credit card, but you are free to use as much of the limit as you want. When the bill is due, you must pay the balance in full before the due date.
Another type of credit is an installment loan. With this type of loan, you borrow a lump sum and then pay it back in monthly installments that include interest. mortgagesauto loans, student loans and other personal loans are examples of installment loans.
Open credit is another type of credit. An example is your monthly utility bill, which varies. You pay for access to utilities after you use them, right? So if you pay your utility bill on time, you are successfully managing open credit.
Now, don’t go out and buy a car to access the credit mix category of your FICO score. As you go through life, you’ll find that you naturally end up with a mix of credit.