Understanding Your Credit Score: What Matters and What Does Not
Your credit score affects the interest rate you pay on mortgages, car loans, and credit cards, and it can even influence apartment applications and insurance rates. The good news is that the factors behind it are well known.
The five main factors
FICO, the most widely used scoring model, groups its factors roughly as follows:
- Payment history (about 35%): Whether you pay on time. A single payment that is 30 or more days late can hurt your score for years.
- Amounts owed (about 30%): Especially your credit utilization, meaning credit card balances divided by credit limits. Lower is better; many experts suggest staying under 30%, and under 10% is even stronger.
- Length of credit history (about 15%): The age of your oldest account and the average age of all accounts.
- New credit (about 10%): Recent applications and newly opened accounts.
- Credit mix (about 10%): Having experience with both revolving credit, such as cards, and installment loans.
Common myths
Checking your own score hurts it. It does not. Checking your own credit is a soft inquiry with no effect.
You need to carry a balance to build credit. You do not. Paying your statement in full every month builds credit just as well and costs nothing in interest.
Income affects your score. It does not appear in your credit report, although lenders may consider it separately.
How to improve your score
- Set up autopay for at least the minimum on every account so you never miss a due date.
- Pay down card balances, or make a payment before the statement closing date so a lower balance gets reported.
- Keep old accounts open when they have no annual fee.
- Apply for new credit only when you need it.
- Review your reports for errors and dispute any mistakes.
In the United States you can get free credit reports from all three bureaus at AnnualCreditReport.com, the site authorized by federal law.