How to Understand Your Credit Score: The Complete Guide

The main factors in how your credit score is calculated are payment history, credit utilization ratio, age of credit history, credit mix, and new credit inquiries. Some of those aren’t exactly self-explanatory, so let’s go over what they all mean.

Payment history

Payment history refers to whether you pay your bills on time. It takes years to build a strong payment history, and it can take just as long to bounce back from late payments if you’re rebuilding your credit. Be aware that credit bureaus can only go by the payments reported to them and as such, not every bill will make it to your credit report and affect your credit score.

Activity on credit cards and loans is usually reported to credit bureaus. With other types of bills, it’s hit or miss. The good news is that credit bureaus have been coming up with ways to include more types of payments, such as rent and utilities, in consumers’ credit scores.

Payment history is very important in most credit scoring systems. It makes up 35% of your FICO® Score.

Credit utilization ratio

Credit utilization ratio is how much of your available credit you use. This category focuses more on your credit card balances, and it compares all your available credit to your reported balances. If you have $1,000 in balances and $5,000 in available credit, then your credit utilization is 20%.

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A low credit utilization is better for your credit score. There’s no specific amount separating good and bad credit utilization. It’s more of a sliding scale: 30% is better than 40%, which is better than 50%, and so on. The conventional wisdom has long been to keep your credit utilization below 30%, but it’s better if you can get it even lower.

Your credit utilization accounts for 30% of your FICO® Score.

Age of credit history

Age of credit history may sound straightforward, but it’s more complex than you’d think. It can include all of the following:

  • The average age of your credit accounts
  • The ages of each individual credit account
  • The age of your newest credit account
  • The length of time since using each credit account

As you’d expect, older accounts are better. The age of your credit accounts is 15% of your FICO® Score.

Credit mix

Credit mix measures the diversity of your credit accounts. It helps your score to have a variety of accounts, such as a credit card, a mortgage, and an auto loan. Lenders want to see how you manage different types of credit rather than just one.

You probably wouldn’t want to borrow money just to boost your credit score, and you don’t need to. Credit mix is 10% of your FICO® Score, and it’s possible to get a high score even if you only have credit cards.

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New credit inquiries

A new credit inquiry occurs when you apply for a credit account. The creditor will need to check your credit file, and this is called a credit inquiry. While one credit inquiry won’t have much of an impact on your credit score, multiple inquiries can add up.

Like credit mix, new credit inquiries are 10% of your FICO® Score.

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