The content is accurate at the time of publication and is subject to change.
For many people, three digits that represent credit scores are confusing. It's not quite clear how credit reporting agencies come up with the numbers. But don't worry, here are the basics of your credit score.
A credit score is a numerical expression of your creditworthiness or reliability as a borrower. Lenders use your credit score to understand your financial situation and predict how likely you are to repay the money you borrow. There are two major credit scoring systems that help lenders with that: FICO (Fair Isaac Corporation) and VantageScore. To get a picture of your overall credit situation and calculate scores, FICO uses five categories, and Vantage Score uses six. As a result, you get a three-digit number that shows your creditworthiness.
Here are six categories that make up your credit score:
- Payment history. It is the most important factor in your credit score. It makes up about 40% of your VantageScore and 35% of your FICO score. Always try to pay your loans and credit card bills by the due date to make sure you have no late or missed payments. Being consistent is important as late or missed payments can stay on your reports and affect your score for up to seven years.
- Amounts owed. With FICO, that is 30% of your credit score and includes the amounts you owe on each individual credit account and in total. It also takes into account the portion of your available credit that you're using. Lenders prefer to see these values at lower levels because that suggests you'll pay off your debt quickly. VantageScore also includes credit utilization and available credit into this category and together they make up about 34% of the score. Again, showing lenders that you are moderate in the amounts you borrow is a plus.
- Length of credit history. The age of your credit accounts is worth about 15% of your FICO scores. The age of your oldest account and the newest one, as well as the average age of all your accounts are considered. VantageScore also includes type of credit here and together they make up about 21% of the score.
- Credit mix. 10% of your FICO score is the types of accounts you use, such as credit cards, personal loans, mortgage, and retail loans. As a rule, lenders like to see that you can manage various accounts responsibly.
- New credit. The credit accounts you've applied for recently have small impact to your credit score, but also count. For FICO that's 10% and about 5% for VantageScore. Recently opened accounts and new credit inquiries may indicate your future financial performance.