How is My Credit Score Made Up?

Your credit score - or credit number - is a snapshot of your credit history. This score takes into consideration the kind of debt you may have, such as revolving credit (e.g. credit cards) and installment loans (e.g. no credit loans, auto loans, or home mortgages).

However, what makes this number a "score" is the creditworthiness associated with it: If you've handled your credit obligations in a responsible manner, your score will be high and reflect favorably on your risk as a borrower. If you've had late payments on loans or have exceeded your limit on credit cards, your score will be lower.

Obviously, this too affects your risk as a borrower, though not in a positive manner. Your credit score is also known by a different name: Your FICO score.

This evaluation method was created by Fair Isaac Corp (FICO) and is now the most trusted record of a person's credit pattern and provides information for 90 percent of all financial institutions in the U.S. A person's FICO score can range from 300 to 850 - the higher the number, the better. In 2010, the average credit score in the U.S. was 723.

Since landlords, utility companies, or prospective employers may evaluate your credit score, it's beneficial to understand how your credit report is created.

The Five Factors that Make Up Your Credit Score

Let's break things down...

Your credit score is generated by a mathematical formula and that final number takes into consideration five different components.

Not all five parts weigh equally and when you see each element, you'll understand why some factors are more important than others.

1. Payment History

Lenders like to see long, steady, responsible credit histories when evaluating someone for new or additional credit. That's why your payment history is considered the most important part of your entire score at 35 percent.

Many lenders believe that past performance is a strong indication of future performance. Pay on time all the time, great. If your payment history is inconsistent, you may experience problems with future lenders.

2. Credit Usage/Reliance

Coming in second at 30 percent is not only your use of credit but also the amount you use it. By this, we're not talking about charging your Monday morning latte because you're in a hurry. The pattern lenders would look for is when you're using your plastic for groceries, dinners, car repairs, new clothes, and other retail endeavors.

A buying history like that can tend to show a lack of priority regarding your spending habits.

A rule of thumb according to is that lenders like to see consumers use no more than 30 percent of the credit available to them. Of course a lower ratio is better and FICO believes people with the highest credit scores use approximately 20 percent of their available credit.

3. Length of Your Credit History

While this calculation for the 15 percent of your credit history seems to be a bit of a drop from your credit utilization, keep in mind that lenders - and often banks - appreciate loyalty.

What does that mean? There are consumers who open new credit card accounts based on the introductory or "teaser" rate. Sometimes people find that such offers don't include a minimum member term. Or, if there is a term, once it's over the card is cancelled.

Banks too, often entice new customers with free gift cards or referral rewards incentives when a friend opens an account. Similarly, once the restrictions have expired, the account is closed.

For very clear reasons, these customers are not the kinds of long-term relationships that lenders seek to cultivate.

If your history shows a similar pattern, your short-term business is not going to be very attractive to certain lenders.

4. New Credit

While numbers 4 and 5 both constitute 10 percent of your total credit score, it's worth a moment to look at each individually.

New credit can be a temptation for people who've recently received a raise, promotion, or have changed occupational fields to a better-paying industry. You want to avoid the impulse to open a new account at your favorite retail store (even if it's for business attire) and buy a new car. There can be so much seduction from introductory rates for credit cards or "promotions" from various auto dealerships.

Even if you've received a substantial promotion, it's probably best to be conservative, especially since the economic downturn of 2007/2008 has not fully recovered.

5. Credit Mix

And that conveniently brings us to credit mix. When you're looking to borrow money - or additional money - lenders want to see diversity.

For instance, if you're looking to buy a car - a substantial investment and an installment loan - and all that's on your credit report are retail-oriented credit cards, a lender may think twice.


For many retail credit cards the minimum due (depending on your balance) is far less than $100 per month. Even with a generous down payment, an additional $200 per month (or $2400 per year) for your car loan can be stretch on any wallet.

Making Wise Credit Choices

Since your credit score and credit history affects so many other areas of your life, the ways that you handle your debt responsibilities is important.

If you're falling behind on an account, such as a medical bill, call to set up a payment plan to avoid it going to a collection agency. Additional information that goes on your credit report includes public records, such as third-party collections, and inquiries from other lenders including credit card companies and auto dealerships.

You can request a free credit report each year from to see what kinds of activity appears in your history to keep on top of any incorrect information.

If you're looking to improve your credit score, here are three easy tips:

  • Pay your bills on time - even with late pays, begin a new pattern today
  • Pay down credit cards - getting to 10% of your limit raises your score
  • Apply for any new credit only if you need it

Many people make credit mistakes, but understanding how your credit report works and taking steps to improve the way you handle your debt can really improve your life. People with good credit scores get better interest rates on new debt and don't run the risk of being denied an apartment from a landlord.

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