Credit scores were created to measure a consumer’s risk of defaulting on a loan. Three national bureaus track consumer credit in the United States – these are Experian, Equifax, and TransUnion. A company called FICO creates a score based on information gathered from the three bureaus. Scores range from 350 to 800 and the higher the score, the more credit-worthy a consumer is considered.
Credit scores are based on 22 different items of information that fit into five basic categories that are: payment history, amounts owed on accounts, credit age, account mix, and new credit.
35% of a credit score is based on payment history. Do your pay bills on time? If you pay late, how late? When did you last miss a payment? The more prompt you have been in paying your bills, the higher your credit score will be.
30% of the score is based on amounts owed which includes how much credit you have, how much credit you use, and how many accounts have balances. Using less of the credit you have available improves your credit score.
Credit age is 15% of the score and refers to how long accounts have been open and how long it has been since they have been used. The longer accounts have been established the better it is for your credit score.
Account mix refers to how many different types of credit accounts a consumer has and makes up 10% of the score. Do you have credit cards, auto loans, and student loans? Your credit score is higher if you have a more diverse mix of accounts.
Finally, new credit tracks how recently accounts have been opened. It is the flip-side of credit age; the more new accounts a consumer has the more they lower the credit score. New credit makes up 10% of the total score.
