Your credit history is measured with a three-digit number known as your credit score. Credit scores are based on the information in your credit report and range from 300 to 850 with higher scores being better. Creditors and lenders use your credit score to decide whether to approve your application and what interest rate to give you. Your current credit card issuer might use your credit score to decide whether to increase or decrease your credit limit.
The credit score formula looks at groups of information in your credit report and gives them different weights.
Payment history is 35% of your credit score. Your credit score takes into account how often you’ve make your payments on time. Late payments, including charge-offs, debt collections, bankruptcy, and foreclosure, all hurt your credit score. Making timely payments on your accounts will boost your credit score.
Level of debt is 30% of your credit score. It’s best that you only use a portion of the credit that’s been granted to you. Anytime your credit card balance exceeds 30% of the credit limit, your credit score takes a hit. Keeping your balance at a reasonable level helps your credit score.
Age of credit is 15% of your credit score. The longer you’ve had credit, the better your credit score will be. On the other hand, a short credit history isn’t so good for your credit score.
Mix of credit is 10% of your credit score. This measures your experience with different types of credit. Having only one type of credit, like only credit cards or only loans, will hurt your credit score. It’s good to have a variety of accounts.
Recent applications is 10% of your credit score. Making too many credit card and loan applications within a short period of time will reduce your credit score. All applications made within the previous 12 months remain in your credit report and influence your credit score.
Your FICO credit score is the score that’s most often used by lenders. The credit bureaus – Equifax, Experian, and TransUnion – also calculate your credit score and sell it directly on their websites or through a third-party.