- What Is Credit? (And Why It Matters)
- What Is a Credit Score?
- What Is a Good Credit Score?
- How to Check Your Credit Score
- How Are Credit Scores Calculated?
- How to Build Your Credit From Scratch
- How to Improve Your Credit Score
- How to Fix Your Credit Score
- What Is a Credit Report?
- How to Get Out of Debt
- How Many Credit Cards Should I Have?
How Are Credit Scores Calculated?
Credit scores are calculated based on several factors, but the two most important are whether you’ve been paying your credit cards and loans on time, and how much you owe.
Quick take: The information on your credit reports, including your payment history and the details of your loans and credit cards, is run through an algorithm to calculate your credit score. There are many different score algorithms, but FICO, creator of the most ubiquitous score, says there are five key elements:
- 35% of a credit score is based on your payment history
- 30% on how much you owe
- 15% on the length of your credit history
- 10% on new credit
- 10% on your credit mix
Tell me more! Based on that breakdown, here are tips for achieving the best possible credit score:
- Payment history: Pay on time whenever possible, because payment history is the biggest driver of your credit score. Also, recent activity (within the past two years) is weighted more heavily. The more on-time payments you make starting now, the better it is for your credit.
- How much you owe: The second biggest driver of your credit score is this: How much of your available credit card limits have you borrowed? Keep that credit utilization ratio below 30%. Consider the ratio both from an overall perspective — all of your credit card balances added together and divided by your total credit limit across all of your cards — as well as card-by-card, and try to keep all of those numbers below 30%. The lower your ratio, the better.
- Length of credit history: If possible, keep credit accounts open rather than closing them, because the longer your credit history, the better.
- New credit: Opening new credit accounts can lower your credit score, at least in the short term, because lenders see it as a possible sign that you’re hurting for cash. That doesn’t mean you should never open a new account, but be aware that your credit score might get a temporary ding if you do.
- Credit mix: Diversifying your credit mix by having installment loans (e.g., a car loan, student loan, credit-builder loan, mortgage) as well as revolving credit (credit cards), can be good for your credit score. But don't make decisions solely for your credit score — consider your overall financial situation too.
One more thing: You have more than one credit score (some studies say we each have 49 scores), because there are many different score algorithms out there. Best policy? Pick one free credit score to monitor. If it's nudging higher over time, it's likely all of your credit scores are going in the same direction. Read how to check your credit score for more.
Bottom line: Paying on time is the single most important thing you can do for your credit score. Even if you’ve got some dings on your credit from the past, focus on paying on time from here on out. Over time, your credit score will go up.
Did you know?
You don’t need to carry a credit card balance to improve your credit. I use my credit card all the time, but haven’t carried a credit card balance in decades. My credit score is in the 800s. If possible, pay off your credit card balance early and often. You'll avoid interest charges and build credit. Ta-da!
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How to Check Your Credit Score
How to Build Your Credit From Scratch