What Are the Components of a Credit Score?
There are five main credit score components: Payment history, amounts owed, credit history length, credit mix and new credit.
October 14, 2022
Your credit score can affect many aspects of your life, from your ability to get a loan to the rates you pay on your car insurance. To improve your credit, it’s first helpful to understand how credit works. How is a credit score calculated?
There are five main credit score components to consider, each of which contributes to your overall credit score. Let’s dive in and learn more about each factor.
What is a credit score?
A credit score is a numerical rating ranging from 300 to 850. The FICO® scoring system is the most commonly used. 300 is the lowest score, while 850 is the highest possible score. The higher your score, the better the possibility of qualifying for credit products with favorable interest rates and terms.
Credit scores are one factor used by lenders to determine your creditworthiness. When you apply for a loan or credit card, the lender will access your credit report, which contains your credit score and other financial information.
Using your score and other factors, the lender will decide whether or not they want to loan you money — and at what terms. The higher your credit score, the better interest rates you will be offered (and the more likely you are to be approved for a loan).
Credit scores are also used by insurance agencies, landlords and even employers in some cases.
What are the components of a credit score?
Credit scores are a numerical measure that are based on an algorithm. The algorithm takes five components into consideration:
The history of your payments
The amounts you owe
How long you’ve been using credit
Your mix of credit types (loans, credit cards, etc.)
The amount of new credit you’ve applied for recently
We’ll break down each of these factors below.
Payment history: 35% of credit score
Payment history includes the number of payments you’ve made and whether or not those payments have been on time. It’s the largest ranking factor, accounting for 35% of your credit score.
It’s very important to make on-time payments each billing period, even if it’s just the minimum payment.
Amounts owed: 30% of credit score
The amounts you owe and the percentage of available credit you are using is the second most important factor. This factor considers your credit utilization, which is the percentage of available credit that you’re actively using.
It’s a good idea to keep your credit utilization to less than 30% to improve this credit rating factor.
Credit history length: 15% of credit score
The length of time you’ve been using credit makes up 15% of your FICO score. Lenders typically like to see an established history of responsible credit usage.
To improve this factor, it’s wise to start building credit from a young age and to keep old accounts open.
Credit mix: 10% of credit score
Your mix of credit — meaning the variety of credit types that you’ve used — accounts for 10% of your FICO Score.
Having multiple types of credit, i.e., revolving credit and installment loans, is beneficial for improving this factor.
New credit: 10% of credit score
The amount of new credit you’ve applied for and the number of credit inquiries on your record makes up 10% of your FICO Score.
Limiting new credit applications is helpful for improving this factor.
What accounts impact my credit score?
How is a credit score calculated using the various types of financial accounts? Only certain account types count towards your credit history. This includes:
Other installment loans
Lines of credit
Normal bills, like rent and utilities, do not affect your score.
What hurts my credit score?
Certain things can hurt your credit score. It’s best to avoid these whenever possible.
Missing payments affects your payment history, which is the largest factor in your overall credit score. To avoid missed payments, it’s wise to set up autopay on all your accounts.
For installment loans like mortgages or personal loans, a payment must be for the full payment due amount in order to qualify. For credit cards, you only need to make the minimum payment in order for the payment to qualify.
Too many inquiries
Inquiries occur when you apply for credit and a lender pulls your credit report. Each inquiry (also called “hard pull”) has a small negative impact on your credit score. The effect is temporary, but having multiple inquiries can have a more significant impact.
The amount of debt you have impacts your credit score, as does the percentage of available credit that you’re using. These are measured by the debt-to-income ratio and the credit utilization ratio, respectively.
Using credit responsibly and keeping your utilization to under 30% is recommended.
If your credit card debt is rising, Tally† may be able to help. Tally is an app that helps qualifying Americans consolidate credit card balances into a lower interest line of credit. Learn how Tally works.
Limited credit history
Lenders like to see that you can use credit responsibly. The more positive credit usage data you have on your report, the better.
If you have a limited credit history, it may be worth applying for a secured credit card or a credit builder loan. For more ideas, read through our guide on how to build credit.
Ways to improve your credit score
If your credit score has dropped, you may be looking to give it a boost. It can take a while to improve your credit score, but here are some areas you should focus on.
Making consistent, on-time payments on all your accounts is the most important thing you can do to improve your credit. And if you do submit a payment late, consider writing a late-payment removal letter to address your mistake.
Lenders and credit scoring models use your debt-to-income (DTI) ratio to determine creditworthiness. This factor simply compares the amount of debt you have to your current income level.
There are two ways to improve your debt-to-income ratio: Either lower your debt or raise your income. By focusing on paying off debt, you can save money while also improving your financial situation.
Too many hard inquiries can have a negative impact on your credit. New applications affect your “new credit” factor, as well as your average age of accounts.
It’s best to limit applications to an as-needed basis. In other words, only apply for new credit if you actually need it.
One exception to consider here is if you’re rate shopping for a large loan, like a mortgage. Credit scoring models consider similar inquiries made in a 14-day period as a single inquiry. In other words, you can apply for pre-approval from 3 different lenders and the effect will be the same as a single inquiry — but only if all 3 inquiries are made within a 14-day period.
How is a credit score calculated? Scores are calculated using the FICO scoring model, which takes into account payment history, amounts owed, length of credit history, credit mix and new credit.
By understanding the components of a credit score, you can make informed decisions on how to improve your own credit rating. For more insight, check out the Tally blog.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.