What Creates a Credit Score?

You aren’t born with a credit score, but you get one as soon as you start buying anything on credit. Once your creditors start reporting your financial behavior to the credit bureaus, you generate a credit report, which is a detailed history of your credit transactions, both good and bad.

Here are the five factors that go into your FICO credit score from most to least important:

1. Payment history (35 percent of your score): Payment history is the most important factor to lenders. How you’ve managed credit in the past is a good predictor of how you’ll manage credit moving forward. Lenders look at how you handle credit cards, store credit cards, installment loans (such as a car or student loan), and mortgage payments to determine payment history. Bankruptcies (which can stay on a credit report for 10 years), wage garnishments, and lawsuits also go on a credit report and significantly lower a score.

2. Amounts owed (30 percent of your score): Lenders consider how much you already owe other creditors to determine whether you can take on more debt. The less you owe others the better. It’s best to have available credit and to use only a small percentage of it. This shows lenders how responsible you are with credit. It’s not good to use all or a high percentage of the available credit you have. If you max out all your credit cards, for example, it appears that you are overextended and are more likely to miss a payment.

3. Length of credit history (15 percent of your score): The longer you’ve had credit the better, since that gives lenders a more accurate picture of your credit history. So don’t close an old credit card account that you no longer use. If you keep it open, you’ll have a longer credit history. Note that if you just started building credit, you can still get a high score if you manage your credit well.

4. Credit mix (10 percent of your score): You get a higher score if you have a mix of credit rather than just one type. A credit mix gives lenders a better picture of your credit transactions. You don’t need to have every type of credit to get a good score, but if you have more than one type, such as a credit card and an auto loan, your score will be a little higher than if you have only an auto loan, for example.

5. New credit (10 percent of your score): Whenever you apply for credit, an inquiry from the creditor appears on your credit report. When you get too many inquiries, your credit score declines. Inquiries remain on your credit report for two years, but FICO considers only inquiries from the last 12 months. Note that rate shopping does not negatively affect your credit score. If you have multiple inquiries while shopping for a mortgage loan, for example, FICO treats all those mortgage loan inquiries as one, figuring you will be getting only one mortgage (As long as these multiple inquiries are all within a 45-day period from the first mortgage inquiry).

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