Q and A: How is my Credit Score Determined?

Q:   I know how important a good credit score is, especially since I’m interested in buying a home.  But how exactly is my credit score determined?  What matters the most in maintaining a good score?

A:    A good credit score is usually in the mid-700s or higher.  Your credit score is determined based on 5 different factors.

1.  Payment History

Accounting for about 35% of your overall score, this is the largest portion of your credit score.  To keep this piece of the puzzle at its highest, pay your bills on time–any payments that are made over 30 days late will be damaging to your score.

2.  Amounts Owed

Second to your payment history, the amount you owe represents 30% of your credit score.  Having some debt is completely acceptable, as long as you are not overextending yourself financially.  For example, owing more than 50% of the total credit available on your credit cards will bring your score down here.

3.  Length of Credit History

About 15% of your credit score is determined based on the length and consistency of your credit history.  The longer you can show you’ve been borrowing responsibly and making payments on time, the more likely it is that a lender will feel comfortable lending money to you in the future.  Tip: Try to avoid canceling old credit cards as that also deletes your credit history for that account.

4.   New Credit

Ten percent of your score will look at any new accounts you may have opened or applied for.   Without a long credit history, for example, it might look suspicious if you open multiple accounts in a short amount of time.  Every time you apply for a credit card or have your credit score pulled too much in a certain amount of time will also damage your overall score.

5.   Types of Credit in Use

The last 10% of your credit score is determined based on the types of debt you have.   If you have debt, this portion of your score will remain high as long as your debt is spread out between various types of loans.  Owing a large amount of money only on credit cards will damage your credit more than if you owed only some money on credit cards and the rest on student loans, car loan, a mortgage, etc.

To find out how you stack up, you can order a copy of your credit report from any number of online sources, like Equifax.com or Freecreditreport.com.  Go over your transactions and history, make sure everything is correct, and dispute anything that isn’t.  As long as you stay on top of your credit activities.  improving and maintaining your score can be easy.  Regardless of how you may score, it’s important to know where you stand and what is affecting your credit score.


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