Credit report bureaus are intentionally vague about how their credit scores are calculated. Because of this, it is impossible to know exactly how different types of credit activity will have an impact on your credit rating.
But we do have a general idea of how credit scores are calculated, thanks to guidelines from the major credit bureaus. Whether you’re looking to protect a strong credit score or you’re seeking ways to rebuild your credit, these guidelines can help you identify ways to improve your own credit profile.
Here’s a look at the five main factors that determine your credit score and tips for what you can do to improve your rating in each case.
On-Time Payment History
Your bill payment history is the single most influential factor on your credit report, accounting for about 35 percent of your credit score calculation. This category looks at your payment history for all of your accounts, including accounts that have gone to collections and even bankruptcies.
In general, larger late or missed payments are more damaging to your credit score than smaller ones. Recent late payments also have a greater impact on your credit score. As time goes by, the impact of those late payments decreases until they’re removed from your credit report.
What you can do: Always make on-time payments to all of your accounts. Consider setting up automatic payments if you struggle to keep track of payment due dates. You can also consider asking companies to remove a late payment from your record if you have an otherwise good history with them—they may be willing to cut you a break, which can instantly boost your credit score.
The amount of debt on your revolving credit accounts represents about 30 percent of your credit score. Although it can improve your credit rating to open credit cards and have access to revolving credit, overusing these accounts could quickly sink your credit score.
In general, credit card owners should keep balances below 30 percent of their total credit limit. But even lower is better, and a balance accounting for less than 10 percent of your total available credit is ideal.
What you can do: Limit credit card spending to keep your debt utilization low. Consider asking for credit limit increases every six months or so, to increase your available credit and reduce your overall debt utilization.
Your credit history demonstrates creditworthiness by showing that you can maintain long financial relationships with companies that have provided you credit in some form.
All types of financial accounts—including checking and savings accounts, credit cards, mortgages, and personal loans—are calculated in your credit history, which accounts for about 15 percent of your overall credit score.
What you can do: Credit history is hard to improve quickly. The best thing you can do is keep old accounts open to increase the average age of your accounts. Over time, the length of your credit history will increase, and your score will see a modest benefit.
Credit Inquiries/New Credit
Whenever you make a hard inquiry on your credit report—such as when applying for a new credit card or opening a new type of loan with a bank—a credit inquiry is registered on your credit report. Too many inquiries and new credit accounts can signal that you’re in desperate need of credit and potentially taking on more debt than you can handle.
Credit inquiries only stay on your credit report for two years, unlike other types of credit information. Sometimes these inquiries are tough to avoid; if you need to finance a new car to get to work, for example, you have no choice but to log a new inquiry on your credit report.
What you can do: Minimize inquiries by avoiding unnecessary credit activity, such as applying for retail credit cards or other financial products you don’t really need. Space out requests for credit over time so that you never have a high number featured on your credit report.
Lenders prefer to see customers who successfully manage a variety of types of credit. This factor only affects about 10 percent of your overall credit score, but it can help your credit profile to maintain several different types of credit accounts.
What you can do: Maintain your checking and savings accounts; use credit cards responsibly; take out auto, home, and personal loans when needed; and keep all of these accounts in good standing.
Building up your credit score takes time, but you have a clear path forward if you’re determined to make meaningful changes to your credit report. Take this knowledge about credit score calculations and use these financial tips to build a credit report that earns a stellar rating.