What Goes Into a Credit Score?

Your credit score is the primary measurement of your financial health, influencing everything from loan approvals to interest rates. That 3-digit number between 300 to 850 is the first thing most lenders will look at when determining your creditworthiness. The higher your credit score, the more lenders will see you as a safe borrower who will repay a loan. But what exactly contributes to this score? Let’s dive into the various factors that affect your credit score, so you can learn how it is calculated and ways to improve it.

What is a credit score?

A credit score is a three-digit number that basically ranks your financial behavior based on data from your credit report. The number is calculated using your recent payment history, credit utilization, and types of credit accounts. Lenders use this score to determine whether to extend credit to you and at what interest rate.

Why is your credit score important?

Your credit score plays a vital role in your financial life. The better your score, the more likely you will:

• Get approved for loans and credit cards
• Qualify for lower interest rates
• Pass tenant screenings for rental properties
• Receive reduced premiums for auto and home insurance

Monitoring your credit score is important so that you can achieve your financial goals.

Key factors that influence your credit score

Payment history

One of the most significant factors affecting your credit score is your payment history. Making on-time payments accounts for approximately 35% of your total score. Credit bureaus who determine scores factor in all accounts paid on time, the frequency of late payments, and any accounts that have gone to collections.

Credit utilization ratio

The credit utilization ratio measures how much credit you are using compared to your total available credit. It typically accounts for about 30% of your credit score. Keep your credit utilization below 30% to be safe. For example, if you have a credit limit of $10,000, aim to keep your balance below $3,000. Using a high percentage of your available credit can signal to lenders that you may be overextended financially, and lead to a lower score.

Length of credit history

The length of your credit history accounts for approximately 15% of your score. This factor considers how long your accounts have been active. Longer credit histories give lenders more data on your financial behavior and are generally viewed positively. Those who open several new credit accounts in a short period can lower your average account age and negatively impact your score.

Types of credit accounts

The diversity of your accounts makes up about 10% of the calculation. Maintain a mix of credit types—credit cards, personal loans, auto loans, mortgages—to positively influence your credit score.

New credit inquiries

Lenders perform a hard inquiry on your credit report each time you apply for a new line of credit. This accounts for about 10% of your score. Hard inquiries can lower your score slightly, especially if you have multiple inquiries in a short time. Soft inquiries, like when you check your own credit score, or pre-approval checks to determine loan offers, do not affect your score.

Credit score vs. credit report

What is a credit report?

While the credit score is the 3-digit number that determines your credit worthiness, a credit report is the detailed document that outlines your financial history and includes the data that informs your credit score.

Key components of a credit report

• Personal information: This section includes your name, address, Social Security number, and employment history.
• Credit accounts: This is a list of all your open and closed credit accounts, including credit cards, mortgages, and loans, along with their current balances and payment history.
• Credit inquiries: This section shows all the hard inquiries made by lenders when you applied for credit.
• Public records: Any bankruptcies, foreclosures, or tax liens will be recorded here.

How to get your credit report

You can get your credit report for free once a year from each of the 3 major credit bureaus: Equifax, Experian, and TransUnion. To obtain your reports, follow these steps:

1. Visit AnnualCreditReport.com
2. Click on the button to request your free credit reports.
3. Fill out the required personal information.
4. Choose which reports you would like to access

You can also see your free credit report anytime at Best Egg Financial Health. There you can get a breakdown of your credit score, the factors influencing your score and a customized breakdown of ways to improve it.

Monitoring your credit report

Regularly monitoring your credit report is essential for maintaining a healthy credit score. You can check your report more frequently if you suspect fraud or are planning to apply for credit soon.

Strategies for improving your credit score

1. Make payments on time- Establish a system to ensure you never miss a payment. Set reminders, automate payments, or use budgeting apps to help you stay on track.
2. Reduce credit utilization- Aim to keep your credit utilization below 30%. You can achieve this by paying down existing debt, requesting credit limit increases, or spreading your charges across multiple cards.
3. Maintain old accounts- Keep older credit accounts open, even if you don’t use them frequently. This helps maintain a longer average credit history.
4. Limit new credit applications- Be selective about applying for new credit. Multiple inquiries in a short period can negatively impact your score.
5. Check your credit report regularly- Keep an eye on your credit report for inaccuracies or signs of identity theft. Dispute any errors you find promptly.

Common myths about credit scores

Checking your credit score lowers it

Many people believe that checking their credit score will negatively affect it. However, this is not true. Checking your own score is classified as a soft inquiry and does not impact your credit.

Closing old accounts improves your score

Closing old accounts can actually hurt your score by reducing your overall credit history length and credit mix and increasing your credit utilization ratio.

You only have 1 credit score

In reality, there are multiple credit scoring models, and your score can vary depending on the model used. It’s essential to monitor them all, understand the different scoring systems and which system a particular lender may be using to get your score.

Conclusion

Understanding what goes into a credit score is vital for anyone looking to improve their financial health. Be aware of the key factors that influence your score and take proactive steps to manage your credit to enhance your creditworthiness and secure better financial opportunities. Regularly monitor your credit report, make timely payments, and maintain a healthy credit utilization ratio to achieve a strong credit score. Remember, a good credit score is not just a number; it’s a reflection of your financial behavior and responsibility.

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.