There are many important numbers in your financial life, but few play as important a role as your credit score. Your 3-digit credit score can impact everything from whether you qualify for a mortgage and the interest rate you pay on a car loan to the premium charged by your car insurance company.
With so much riding on that simple 3-digit number, it is important to know how it is calculated. While every credit reporting agency uses a slightly different formula to determine your creditworthiness and calculate your numerical credit score, they all use the same basic factors. The 5 main factors that determine your credit score are:
- Payment history – your payment history makes up approximately 35% of your overall credit score, so paying your bills on time is the number one way to improve your standing.
- What you currently owe – the amount you currently owe your creditors is responsible for roughly 30% of your credit score. The more you already owe, the harder it will be to handle additional debt. Creditors know that, and they make their lending decisions accordingly.
- Length of credit history – how long you have had credit is responsible for approximately 15% of your overall credit score. That is why new graduates often have a hard time getting loans and qualifying for mortgages. The sooner you start building a credit history, the better off you will be in the long run.
- New credit inquiries – the number of inquiries on your credit file makes up roughly 10% of your credit score. If you are trying to improve your credit, applying for a large number of new credit cards could be counterproductive.
- Types of credit used – credit agencies also look at the type of credit you use, and that factor makes up about 10% of your overall credit score. Credit card debt typically is worse for your credit score than mortgages and car loans.