Breakdown of How Credit Score is Determined

Credit Scores will rule your financial life - Make sure you understand how they are created and manage yours to ensure you are a good risk to lenders!

5 factors that determine your credit score
BY AnnaMaria Andriotis, SmartMoney

Are you sure you know how good your credit is?

Do you pay on time?
35% of your credit score
Start marking your credit-card bill due dates on your calendar. Paying your bills on time plays the biggest role in determining your credit score.
To stay on top of your charges, consider setting up an automatic bill payment, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. Look over your past bills, estimate your minimum required monthly payment and set up automatic bill payments for that amount, she says. That way, you’ll meet the payment deadlines, dodge late fees or interest-rate hikes, and remain free to pay the remaining balance at your convenience.
The consumer who pays his bills on time every time maintains an average credit score of 706, Lin says, but the drop-off is huge. The average score of a consumer who pays on time 99%: 658.
Making a late payment can also lead to universal default, the condition in which credit-card companies raise your interest rate on their cards for being late with another company’s payment. Once the Credit Card Accountability Responsibility and Disclosure Act goes into effect, that practice will be curtailed, but if card issuers perceive an increase in a cardholder’s risk level through some other means, they could roughly double their rates, Lin says. The annual percentage rate of the average credit-card firm is now 10.9%, according to Bankrate.com.

What do you owe?
30% of your credit score
Paying bills on time doesn’t guarantee a high credit score. You’ll also need to keep your balances from surpassing 30% of your total credit line.
Your credit score is based in part on your credit utilization ratio, the amount you owe in proportion to your total credit limit. If your credit-card company reduces your credit limit, your debts make up a larger percentage of your credit line. If your line is cut unexpectedly, call your issuer to try to undo the reduction, especially if you’ve been on time with payments and maintain a low balance.
In some cases a credit line reduction is unavoidable, says Linda Robertson, a certified financial planner with Financial Finesse, a financial education company. In the past year, many retailers like Fortunoff and Linens ‘n Things shut down or went into bankruptcy and canceled their credit cards. When their credit-card holders lost those lines, their scores may have suffered, she says.

How long have you been borrowing?
15% of your credit score
A middle-aged consumer often fares better in this category than a recent college grad.
The length of your credit history is basically a straight measure of the number of years you’ve had credit. The trick here is to keep your first credit card open, even if it has a high interest rate or a low spending limit. Use it a few times a year so that the credit-card company doesn’t shut it down, Cunningham says.

Is your credit still expanding?
10% of your credit score
Applying for new credit is often a Catch-22. With new credit, you can prove your ability to handle several payments on a monthly basis. However, applying for too much credit in a few months can slightly harm your credit score, says Cunningham.
“It signals that you’re desperate for credit and don’t have cash available to pay for your needs,” she says.
Opening new accounts over time will raise your credit score in the long term, provided you pay your bills on time, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use. Requesting and checking your own credit report from FICO or one of the three credit bureaus won’t affect your score, he says.

Is your credit diverse enough?
10% of your credit score
To maintain credit diversity, opt for a variety of credit, including credit cards, a car loan or a mortgage – but make sure to pay each bill on time and keep the accounts active. Opening a wide variety of new accounts and not using them won’t raise your credit score, Watts says.

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