Five Factors of Your Credit Score

Clean credit is a goal sought by many whose credit reports contain negative information, but achieved by few. A perfect score is comprised of a number of connected factors. If your credit score represents your overall grade, then your credit report displays the work you put into it. Lenders use your score (a number between 300 and 850) to determine your risk level, and thus, their willingness to work with you. So, how is your credit score tallied?

Clean credit means striking an ideal balance between the five following components:

    • Payment history:

Accounts for 35 percent of your credit score. Lenders need to know how reliable you have been in the past, and your payment history illustrates just that. This section covers:

  • Your payment consistency
  • Collections and charge-offs
  • Bankruptcies, tax liens, etc.
    • Debt utilization: 

Accounts for 30 percent of your credit score. Contrary to popular belief, debt can be a good thing when utilized correctly in proportion to your overall credit limits. This section covers:

  • Your total number of active loans (e.g., mortgage, student debt, etc.)
  • Your credit card debt and credit utilization. The healthiest credit scores are born from a utilization ratio of 25 percent or less. For example, if you have a $10,000 credit limit, your owed balance should never exceed $2,500.
    • Credit length:

Accounts for 15 percent of your credit score. In addition to reviewing your track record, lenders want to be sure you actually have one. A credit history of seven years or more is ideal when establishing clean credit, so make sure to keep your oldest accounts active.

    • New credit:

Accounts for 10 percent of your credit score, but in a negative way. Paradoxically, every new account will likely depress your scores. Of course, you can’t increase (or even have) a credit score without having a track record to begin with. Just know that, with every new account, your credit score will probably get worse before the longer term scoring benefits are realized. Creditors fear those who appear to depend too much upon acquiring new credit accounts.

    • Diversification:

Accounts for 10 percent of your credit score. Smart planning is key in every financial realm, and spreading out your spending is a great way to illustrate this concept. Lenders want to see your experience with numerous credit types. If you only have installment loans, consider opening a bank credit card or another line of credit. Broadening your horizons will demonstrate your flexibility and success with multiple credit forms.

Balancing clean credit is a difficult game to play, and knowing the rules can only help you get better. If you are struggling with your credit and finances, take a second look at the components above and look for areas of weakness in your own credit score. The answers may be more obvious than you think.