What Is In My Credit Score?
It is common knowledge that your credit score is important, but many people are unclear on exactly how their score is calculated. Your credit report is made up of many different pieces of credit data. All of these pieces can be group into five main categories—but these five slices of the credit score pie are not all equal. Some components influence your score more than others. Here is a pie chart to break it down:
As you can see, the largest contribution to your credit score is your payment history. The first thing any lender wants to look at is your past credit cards and loan accounts to see if payments were made on time.
The second largest factor is the amount of money you owe. Using credit cards can help you build credit, however, it is important to keep balances low. Having a couple of credit cards that all have low balances is better for your credit score than having one credit card that is maxed out or multiple that are near their credit limits. Lenders want to know how you utilize your credit, and borrowers that keep their balances low are considered to be smart and responsible borrowers.
The rest of your credit score is influenced by the length of your credit history, the types of credit you use, and new credit. The longer your credit history, the better it is for your score. This factor contributes to about 15% of your credit score. When someone has an older account that they no longer use, the first thing people assume is the right choice is to close it. However, this older account can be a good reflection on your credit. Your credit mix accounts for 10% of your credit score. Lenders like to see a mix of different types of credit (credit cards, mortgages, etc.) because it signifies that the borrower can handle all sorts of credit. Lastly, new credit contributes to 10% of your credit score. Opening two many accounts in a short amount of time could harm your credit score because it could suggest to lenders that you are facing financial trouble.
The importance of each category may vary for certain people, but these percentages give a good indication of the level of influence each has of your overall score.