How Credit Score is Determined
A credit score is determined based on several factors from your credit history. The most commonly used scoring model is the FICO score, which is based on five key components:
1. Payment History (35%): Your record of paying back debts on time is the most important factor. Late payments, defaults, and collections negatively impact your score.
2. Amounts Owed (30%): This refers to how much of your available credit you're using (also known as credit utilization). Keeping your balances low compared to your credit limit improves your score.
3. Length of Credit History (15%): A longer credit history generally leads to a higher score, as it shows that you have more experience managing credit.
4. Credit Mix (10%): Having a mix of credit types, such as credit cards, mortgages, and auto loans, can improve your score because it shows you're capable of managing different types of credit.
5. New Credit (10%): Opening too many new credit accounts in a short period can lower your score, as it may suggest financial instability. Each time you apply for credit, it can result in a "hard inquiry," which may slightly reduce your score.
Each credit bureau (Equifax, Experian, and TransUnion) may calculate slightly different scores based on the information available to them. Keeping track of your credit, managing debt responsibly, and making timely payments are key to maintaining a good credit score.
