5 Essential Elements in Your Credit Score Calculation
Understanding how your credit score is calculated can help you make better financial decisions and improve your overall credit health. Here are the five main factors that help determine your score:
- Payment History (35%)
Your payment history is the most significant factor in credit score calculations. This includes your history of making payments on credit cards, loans, and other credit products—whether they’re on time, past due, or missed.
Consistently making timely payments helps raise your score, while missed or late payments can significantly lower it.
- Credit Utilization (30%)
This refers to the amount of total available credit you are currently using. Your credit utilization ratio is calculated by dividing your current balances by your credit limits.
Lower credit utilization is better for your score. For example, if you have a credit card limit of $5,000 and a current balance of $1,000, your credit utilization ratio is 20%, which generally remains within the recommended range.
- Length of Credit History (15%)
Credit scores take into account how long your credit accounts have been open. This means how long your oldest account has been open as well as the average age of all your accounts. A longer credit history is more beneficial, but if you have a shorter history, focus on building it incrementally over time.
- Credit Mix (10%)
Having a healthy mix of credit types, such as credit cards, mortgages, and car loans, can positively impact your score. A varied credit mix shows potential lenders that you can responsibly handle different kinds of credit products.
- New Credit (10%)
Applying for new credit and the number of recent inquiries on your credit report can affect your score. Making multiple inquiries within a short time frame can lower your score, as it may suggest financial instability.
In summary, your payment history carries the greatest weight in calculating your credit score, followed by credit utilization, length of credit history, credit mix, and new credit. By maintaining a responsible approach to credit use and management, you can work towards improving your credit score over time.