Removing the Mystery from Credit Scores

Removing the Mystery from Credit Scores
October 12, 2015 Prosperity Connection

Credit scores are less of a mystery than you may think. Although the exact algorithm is unknown, we know there are five major components  impacting your credit score. We even know how important the credit bureaus have decided each of these components is when calculating your score. The best part is that you have control over all five areas. Let’s remove the mystery from credit scores by reviewing each of these impactful components.


Pie chart with 5 components of credit score

Image via myfico.com


35% Payment History: Looking over your debts, whether or not payments are made in a timely manner has the largest impact on your credit score. Ask yourself if you are making on-time payments or how late your payments are; much of your credit score depends on those answers. Controlling when payments are made will raise your score going forward; don’t let the past cause you to lose sight of future possibilities.

30% Credit Utilization: Another large portion of your credit score looks at the amount of debt you carry. Think about what the credit limits are versus the balances shown on your monthly statement. Using credit is not a bad thing, but carrying very high balances or having large installment debts can be a red flag. Keep balances low and pay down your debts. A good rule of thumb is to keep credit card balances at 30% or less of the credit limit; this means if you have a credit card with a $500 limit, it would be recommended to use no more than $150.

15% Length of Credit History: Often this is confused with an individual’s age, but the Equal Credit Opportunity Act makes doing so illegal along with it being morally unethical to begin with. The length of your relationship with your lenders, however, is legal.  Keeping long-term credit relationships and avoiding unnecessary new credit has a positive impact on your credit score as your average account age increases.

10% Credit Mix: Consider how much installment versus revolving debt you carry. The best case scenario shows that you can responsibly handle both types of debt.

10% New Credit: Consider how often you apply for credit products.  The number of credit inquiries impacts your score; negative impact can be avoided by only making a credit application when it is necessary. Keep in mind that applying for a store credit card simply for a small discount may not be the best way to manage your credit score, especially considering that the inquiry will appear on your credit report for two years. Checking your credit report from AnnualCreditReport.com does not have a negative impact and is a great resource to obtain free credit reports annually.

35% Payment History + 30% Credit Utilization + 15% Length of Credit History + 10% Credit Mix + 10% New Credit = 100% Credit Score Mystery Removed

By Meghan Northcutt, AFC® Candidate, FFC Candidate