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Credit scores provide lenders a holistic look into your financial history, but there's one factor that matters the most.
Payment history — whether you pay on time or late — is the most important factor of your credit score making up a whopping 35% of your score. That's more than any one of the other four main factors, which range from 10% to 30%.
If you can maintain positive payment history on all of your credit accounts, from credit cards to loans, you can show current and prospective lenders you can repay loans and be well on your way to a good credit score.
The general rule of thumb is that the higher your credit score, the better chances you have at qualifying for credit and receiving the best rates. And while that three-digit number may seem mysterious, you can raise your credit score by understanding the five key factors that make up your score and taking certain actions.
Below, we review the five factors of your credit score and provide tips on how to master each.
What factors influence your credit score
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
1. Payment history
What it means: Whether you've paid past credit accounts on time.
How to master it: Make sure you pay every bill on time. This can be done by setting up autopay, alerts and/or calendar reminders. When you set up autopay, always set it for at least the minimum due. This keeps your account current and results in positive information being sent to the credit bureaus.
While you don't have to pay your bill in full to master this factor (only the minimum payment is required), we encourage you to so you can reduce your amounts owed, which we explain next.
2. Amounts owed
What it means: The total amount of credit and loans you're using compared to your total credit limit, also known as your credit utilization rate.
How to master it: Try to maintain a low credit utilization rate below 10% (but not 0%), which is the threshold FICO "high-achievers" (consumers with credit scores 750 and above) sustain.
To find your credit utilization rate, divide your total balance by your total credit limit and multiply by 100 to get the percentage.
Let's say you have two cards, the Citi Double Cash® Card with a $1,000 balance and $5,000 credit limit (see rates and fees) and the Blue Cash Preferred® Card from American Express with a $2,000 balance and $10,000 credit limit on each.
Combined, your credit limits across both cards total $15,000 and your combined balances equal $3,000.
Here's the math: ($1,000 + $2,000) / ($5,000 + $10,000) = .20 x 100 = 20%
3. Length of credit history
What it means: The average length of time you've had credit.
How to master it: The main way to have a long credit history is to wait. The only way the length of your credit history will increase is by maintaining old credit accounts (and not closing your oldest credit card). It's also key to be aware of how opening new credit accounts affects the average length of time you've had credit.
To calculate your length of credit history, add up how long all your accounts have been opened and divide by the number of accounts. For instance, if you already have a credit card that's 10 years old and open a new one today, your average credit history is halved from 10 years to 5 years.
Here's the math: (10 years + 0 years) / 2 cards = an average of 5 years per card
4. New credit
What it means: How often you apply for and open new accounts that result in a hard inquiry on your credit report.
How to master it: When you're looking to apply for new credit, consider whether a hard or soft inquiry will be performed. Hard inquiries may cause your credit score to drop a few points, though your score should recover quickly.
You can check if you prequalify for credit cards and loans without hurting your credit score. This allows you to shop around for the best offers without hurting your credit score.
5. Credit mix
What it means: The variety of credit products you have, including credit cards (a type of revolving credit), installment loans, auto loans, mortgage loans and student loans.
How to master it: While there's no clear-cut answer to how many different types of credit card accounts you should have, it's a good idea to have more than one type. That may include a credit card plus an auto loan, mortgage or installment loan for your phone, to name a few.
Bottom line
No matter what credit score you have — whether it's bad, fair/average, good or excellent — you should try to master the five credit factors. If you follow the tips we provided above, you can improve your credit score over time and maintain a healthy credit history. And when you do build up to a good or excellent credit score, you'll be able to enjoy many financial milestones, such as buying a home or purchasing a car.
