The Math Behind Your Credit Score

We all know the higher your credit score the better, but what goes into the mystery number might surprise you.

Happy Get Smart About Credit Day! Didn’t know such a thing existed? You’re not alone. But, if you’re anything like me, you might find it a welcome reminder to get your credit in line.

It’s pretty common knowledge that a higher score means better credit. How to achieve that score, however, isn’t quite so widely understood.

In the past, we provided some pointers on how to boost your credit score, but it can be hard to improve a number without knowing what goes into it. I know I should pay my credit card bills on time … but exactly how much will a tardy payment impact my credit score?

In honor of Get Smart About Credit Day, we’re breaking it down and taking a closer look at the math behind that mysterious number.

The 5 factors that influence your credit score

Your credit score is based on 5 factors. Not surprisingly, paying your bills on time is the largest piece of the equation, but things like type of credit (mortgage, personal loan, etc.) and how many times you apply for new credit also have an impact.

1.  35% punctuality

Regularly paying your bills is imperative. Something as seemingly small as late fees at the library or an unpaid $20 parking ticket can impact your credit score. The best way to avoid being penalized (not to mention paying monstrous late fees): pay one-time bills like tickets or medical costs as soon as you receive them. You can also set up automatic bill pay if it’s available or create reminders in your calendar for recurring bills.

2.  30% amount owed

While owing money on lines of credit doesn’t automatically lower your credit score, you could be in trouble if the amount you owe is close to your credit limit. When you’ve used up most of your available credit, it leads creditors to believe that you’re spending beyond your means and less likely to pay your bills on time, if at all.

The real trick is to strike a balance of amount available versus amount spent. According to personal finance website Mint.com, “Consumers should aim to carry balances that are no higher than 30 percent of their credit limits — and the lower, the better.”

3.  15% longevity

The amount of time you’ve had credit opened in your name also plays a role in your credit score. Obviously, without a flux capacitor, you can’t go back in time and open a line of credit sooner, but it’s a good thing to remember when you’re debating closing an old account.

Of course, this doesn’t mean you should run out, open 8 credit cards, and get 2 personal loans just to keep them open for the next 10 years (we’ll cover that in number 5). It simply means that a lengthy history of a few responsibly managed accounts is likely to reflect well on your credit score.

4.  10% types of credit

All different types of credit (mortgages, credit cards, etc.) play a role in determining your credit score. While having a variety can boost your number, you shouldn’t open an account just for the sake of having it.

Having a few different types of credit that are well managed helps lenders feel at ease about your ability to pay bills. If you’ve never had a credit card, you may be considered high risk simply because you haven’t had to manage daily spending with a line of credit before.

5.  10% new credit

As I mentioned, running to the mall and opening 10 new credit cards isn’t going to do you any good. In fact, it’s far more likely to hurt you. Whenever you open a new account, the average length of your credit history drops. Also, requesting a lot of new credit in a short amount of time can make lenders worry about your financial stability.

But don’t worry, it’s not all bad news! If you’re weighing your options while looking for an auto or home loan, getting a few quotes typically won’t affect your credit score, so you can do your homework without being penalized.

The rewards of a quality credit score

When you know what goes into it, managing your credit score can be a lot easier. Although you may not feel the effects day to day, having a good credit score can be a huge advantage when you’re taking a major step (like buying a home, starting a business, or even applying for a big promotion).

Another potential reward of a high credit score? In some states, you could get lower insurance premiums. Pretty cool, huh?

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