Credit Score Factors

Credit scores, most commonly the FICO Score, range from 300 to 850 and are used by lenders to evaluate the risk of lending to you. A higher score generally qualifies you for lower interest rates and better loan terms, which can save thousands of dollars over the life of a mortgage, auto loan, or other credit product.

The five main factors that determine your FICO Score, in order of importance, are: payment history (35%), which reflects whether you have paid your bills on time; amounts owed or credit utilization (30%), which measures how much of your available credit you are using; length of credit history (15%), which considers how long your accounts have been open; new credit (10%), which looks at recent credit inquiries and newly opened accounts; and credit mix (10%), which considers the variety of credit types you have (credit cards, installment loans, mortgage, etc.).

Payment history has the largest impact. Even a single late payment of 30 days or more can significantly lower your score, and the effect can last for years. Keeping all accounts current is the most important thing you can do for your credit score.

Credit utilization, the second most important factor, measures the percentage of your available revolving credit (primarily credit cards) that you are using. Keeping utilization below 30% is a common guideline, but lower is generally better. Utilization is calculated both on individual cards and across all revolving accounts combined. Paying down balances before the statement closing date (not just the due date) can help keep reported utilization low.

Length of credit history considers the age of your oldest account, the age of your newest account, and the average age of all accounts. This is why closing old credit card accounts, even if unused, can sometimes hurt your score by shortening your average account age. Opening many new accounts in a short period can also lower this metric.

Your credit score can affect more than just borrowing. Insurance companies in many states use credit-based insurance scores to set premiums, landlords may check credit as part of a rental application, and some employers review credit reports during the hiring process. Monitoring your credit report regularly (available free through AnnualCreditReport.com) and disputing any errors promptly may help protect your score.