How are credit scores determined?
You have many different credit scores, but there are three that are by far the most impactful. The three major credit bureaus, Experian, Equifax, and TransUnion, each give you a credit score using the two most common formats, FICO and Vantagescore. FICO is the most common and widespread and is used by around 90% of lenders. Your fico score is determined by a few factors:
Payment History (35% of calculation)
The most important factor in determining your credit score is whether or not you pay your bills on time. Missing payments will greatly reduce your credit score, and, adversely, consistently making timely, full payments can go a long way in boosting your score.
Amounts owed (30% of calculation)
This factor can also be referred to as “Credit Utilization.” It is the ratio of your current credit balance to your total credit limit. It is best to keep your balance as low as possible, under 30% of your limit, while still keeping the card active. This will show that you’re not overextending yourself and are at a lower risk of defaulting.
Length of Credit History (15% of calculation)
An important factor that is easy to control is your length of credit history. Building credit in advance of applying for a loan is very important. If you do not have a long enough credit history, it can be impossible for the bureaus to evaluate you before you can get the loan.
Credit Mix (10%)
Having a variety of different credit accounts can show the bureaus that you can handle keeping track of different types of accounts. You do not need to have one of each type, but having a few varying account types can be helpful in boosting your score.
New Credit (10%)
Opening multiple credit accounts in a short period of time can be a red flag for bureaus. It is important to space out actions that would require a hard inquiry into your credit score.