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What goes into a credit score?

Nov 02, 2015 Walt Wojciechowski

Each year, millions of Americans may struggle with having a middling or low credit score, and their desire to improve their standing significantly may be something they're not able to achieve right away. However, with a little bit of hard work and knowledge, the path to good credit doesn't really have to be difficult. In many cases, all people have to do is use some common sense when it comes to how they handle accounts.

For instance, people should try to keep in mind that a credit score is merely a mathematical reflection of how likely a person is to pay all their bills on time and in full every month. The higher the score, the more likely they are to do so. However, some things can occasionally get in the way of that, and keeping them in mind is key to maintaining a good rating.

What's the breakdown?
A credit score is only made up of five components. The first and largest is, as one might expect, how successful a borrower has been when it comes to paying their bills each month, and this component alone makes up 35 percent of a score. Even missing one payment out of, say, five, in a given month can hurt a score badly, and keep it damaged for a period of a few months or more. The only way to maintain as high a score as possible is to make every payment on time and in full.

Next is a factor known as "credit utilization," which is to say, "the amount owed as a percentage of total credit limits," and it makes up another 30 percent of a score. While there is a common misconception that lenders would like people to owe at least something, this isn't actually true; they want people to regularly use their accounts, and then pay their debts as quickly as possible. As such, a credit score will start to fall if a person owes about 30 percent or more of their credit limits. If they have four cards with combined limits of $15,000, they can therefore owe no more than $4,500 before their scores start to drop.

Other factors
The other three factors take up the other 35 percent. The largest of these is the average length of time a person has had all their credit accounts, which makes up 15 percent. The longer the average length, the better this portion of the score, which is why opening new accounts or closing old ones might be detrimental to a rating.

Finally, the different types of credit a person has in their name - more account types is better- and the amount of new credit they have - less is better - both make up another 10 percent each.

Consumers who are still worried about their scores, though, may need to be told about the value of not only knowing the above, but also what alternative credit scores can provide. These latter ratings are effective for many people because they consider more than just how credit was handled, but also other expenses like rent and utilities.