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What Makes Up Your Credit Score?

January 11, 2023


Your credit score can influence many aspects of your personal finances. A good score can make it easier to get approved for loans, rent apartments, and secure better interest rates. A bad score can hold you back in your personal finance journey, making everything more difficult — and more expensive. Credit scores are complex, though and understanding how credit scores work is often the first step toward improving your own score. 

What Is a Credit Score? 

A credit score is a numerical score that measures your creditworthiness, or your estimated ability to pay back loans. It’s based on your credit history, which includes how you’ve handled debts and payments in the past. 

A good score tells lenders that you are likely to be able to repay your debts. It means less risk for the lender, which makes them more willing to lend.

A lower score tells lenders that you are riskier and that you might not be able to repay your debts. This can make lenders more hesitant to lend you money — and often means that you’ll pay higher interest rates if you are approved. 

There are a few different credit scoring models, but the most common is the FICOⓇ credit score. The FICO model is used by around 90% of U.S. financial institutions. 

FICO credit scores range from 300 to 850, with 850 being the best possible score. Scores can be lumped into the following score ranges:

  • Poor credit: 300 to 579
  • Fair credit: 580 to 669
  • Good credit: 670 to 739
  • Very good credit: 740 to 799
  • Exceptional credit: 800 to 850

What Makes Up Your Credit Score? 

Your credit score is made up of data in your credit report. Lenders report information about your credit usage to the credit bureaus, which use this data to compile your credit report and calculate your score. This data includes information on how you’ve handled credit cards, loans, mortgages, and other forms of credit. 

There are five broad categories that go into your credit score:

  • Payment history - 35% of your credit score
  • Amounts owed - 30% of your credit score
  • Credit history length - 15% of your credit score
  • New credit - 10% of your credit score
  • Credit mix - 10% of your credit score

Payment History

Payment history is a record of all the payments you’ve made toward your debts. It’s the most important credit scoring factor, making up 35% of your total credit score. 

Each time a payment is made, the lender reports that data to the credit bureaus. Each on-time payment will improve your payment history and slightly boost your score. 

Late payments, missed payments, or delinquent accounts will damage your score. Even a single late payment can ding your score significantly. Consistency is vital when it comes to improving your score over time with your payment history.

How to improve payment history

Simply keep making on-time payments on all your accounts, and this factor will improve over time. To avoid accidental late payments, it’s a good idea to set up autopay on all your accounts. 

Amounts Owed

Amounts owed refers to the amount of money you have borrowed and currently owe. It’s another very important factor, making up 30% of your credit score. 

From a credit rating perspective, owing money isn’t necessarily a bad thing — it’s more about how much you owe, compared to how much is available for you to borrow. 

Lenders primarily look at factors like your credit utilization ratio, which is the percentage of your available credit that you are using. For example, if you have a total credit limit of $10,000, and you have a total debt balance of $4,000, you are using 40% of your available credit ($4,000/$10,000). This means your credit utilization ratio is at 40%. 

If you are using the majority of your available credit, lenders might view you as a higher risk to default on your debts. A lower credit utilization ratio signals to lenders that you are responsibly using your available credit lines, and are a lower risk. 

How to improve amounts owed

Aim to keep your credit utilization ratio under 30%. In other words, try to use less than 30% of your available credit at any given time. This applies to per-card utilization as well as total utilization. Try not to use any more than 30% of your credit limit on any credit card, while also keeping your total balances under 30% of your combined credit limit. 

Credit History Length

Credit history length refers to how long you have been actively using credit and making payments. It makes up 15% of your credit score. 

The primary way credit history length is measured is by looking at your average age of accounts. This looks at every account and finds the average age of those accounts.

It doesn’t matter if you actually use the accounts — as long as they are open and in good standing, they will contribute to your average age of accounts. However, keep in mind that some lenders will close inactive accounts after a certain period of time. To keep unused accounts open, it’s a good idea to use them for a small purchase once per year or so.

How to improve credit history length

Keep your old accounts open, even if you don’t actively use them. New accounts will also lower your average age, so only open new credit accounts when it’s necessary. 

New Credit

New credit refers to recently opened credit accounts. It makes up 10% of your credit score. 

New accounts are not necessarily a bad thing when it comes to your credit score — but too many recently opened accounts can signal to lenders that you might be a risky borrower. This factor also looks at recent credit inquiries on your file. An inquiry occurs when you apply for a loan or credit card.

Credit inquiries can either be “soft” or “hard”. A soft pull does not affect your credit, but a hard pull does. When applying for new credit, the lender will typically conduct a hard pull, while soft pulls are typically used when checking if you’re preapproved for a loan. 

How to improve new credit

Only open new credit accounts when it’s necessary. You may also wish to consider spreading out new applications over a period of time. The exception to this rule is if you are applying for a mortgage and you’re hoping to shop around for rates. In this case, hard pulls made within a 14-day period are considered as only one inquiry

However, the inquiries must be for the same type of credit. If you check rates from three different mortgage providers in a 14-day period, those inquiries will have no more impact than a single hard inquiry. But if you apply for a mortgage, credit card, and personal loan in the same window, each inquiry will be considered separate and will affect your score. 

Credit Mix

Credit mix refers to the variety of credit accounts that you have open. It makes up 10% of your credit score. 

Lenders prefer to see borrowers who have a proven track record of responsibly using multiple forms of debt. The different types of accounts that are reported to the credit bureaus include examples such as:

  • Credit cards
  • Personal loans
  • Student loans
  • Mortgages
  • Auto loans
  • Lines of credit

How to improve credit mix

Using a variety of credit types can improve this factor. However, it’s best to only open a new account if you actually need it. Remember, this factor only makes up 10% of your credit score. 

Why It’s Important to Understand Credit Score Factors

Understanding what makes up your credit score can help you take active steps toward improving your own credit. With this knowledge in mind, you can make an informed decision on how to boost your score. 

For instance, if you have too much debt, your “amounts owed” factor may be hurting your score. In this case, paying down debt should be your top priority. Paying off your revolving balances, paying on time, and paying more than the minimum are all great habits to help improve your credit score over time. 

The PayOff Loan™ from Happy Money makes it simpler to pay off credit card debt using a lower-interest personal loan. It can help you consolidate your debt into a single monthly payment, save money on interest, and potentially boost your credit score.