What Goes Into a Credit Score and How to Raise Yours

A lot is riding on your credit score. Whether or not you get approved for a loan or a credit card, what interest rate you qualify for on your mortgage—maybe even whether or not you get that job you applied for. But many people don’t really know how their credit score is calculated. They just know they want a higher one.

Whatever your credit score is, but especially if you would like to improve it, it’s important to know what exactly goes into a credit score. FICO, formerly called the Fair Isaac Corporation, is one of the most-trusted and often used credit scoring companies. Their method of analyzing consumer credit reports to assign each person with a certain credit score that indicates how reliable a borrower they are has been around since the 1950s, with some changes over the years.

This is what goes into making a FICO credit score these days:

• Payment history – 35%

This is pretty straightforward. If you pay your bills on time, you will have a good payment history and it will reflect well on your credit score. Paying late isn’t good for your credit score—but if you forget once or twice, don’t worry. You need to be at least 60-90 days late on a payment, or pay late consistently, to have it show up on your credit history and affect your credit score.

• Amount owed – 30%

How much you owe versus how much available credit you have has an impact on your credit score. If you owe a lot, that isn’t necessarily bad; but if all your cards are maxed out, that makes you look less than desirable to potential lenders. Try to keep your balances below 30% of your available credit.

• Length of credit history – 15%

If you got your first credit card when you were in college, and your class reunion is coming up, you probably have a good amount of credit history. Creditors want to see that you have been using credit for a number of years and have a pattern of on-time payments and keeping your accounts in good standing. This is one thing you can’t do much about; if you are young, your credit history isn’t going to be that long. What you can do, though, is make sure you keep your old accounts open. If you have a credit card that is paid off and you don’t use it anymore, don’t close the account or you will lose that nice long credit history.

• Types of credit and new credit – 10% each

The things that matter least, but still matter, are how many different kinds of loans you have, and how many new ones you apply for. It looks good if you have more than one kind of credit: an unsecured credit card and a mortgage, or a student loan and a car loan in addition to a credit card. And try not to apply for a lot of new credit cards; each time a card issuer makes an inquiry to the credit bureau about you, it can potentially put a small dent in your credit score. So only apply for the credit you really need.

If you have bad credit and are ready to start repairing it, order a copy of your credit report and take a close look at each item. Make sure all the information is accurate, and make a plan to improve your credit, using your newfound knowledge of what makes the most difference and how a credit score is calculated.