To many people, a credit score seems like a largely arbitrary number that is difficult to interpret. However, FICO credit scores are calculated from a group of relatively simple factors that are surprisingly easy to understand. Here are the three biggest factors that impact your credit score and what you should know to maximize your credit rating.
Payment History
The single most important component in your credit score is your payment history, which makes up 35 percent of your total score. A consistent history of paying your debts on time without missing payments will contribute to a higher score. Late payments or failure to make your minimum payments will significantly reduce your score. For this reason, the single best thing you can do to ensure your score remains high is to make every payment on time.
Credit Utilization
Making up 30 percent of your total FICO score is your revolving credit utilization, which is a ratio of your total credit use to your total revolving credit limit. If you have a $5,000 limit on your credit card and carry a $1,000 balance, for example, your credit utilization would be 20 percent. To improve your score, keep your credit utilization below 30 percent at all times. Balances in excess of 30 percent will drag your score down, especially if other factors are already working against you.
Length of Credit History
In addition to seeing a history of regular repayment, creditors want to see that you’ve been able to keep that history up over a long period of time. For this reason, the length of your credit history is the third largest component of your credit rating, making up 15 percent of your total FICO score. To keep this metric high, be sure to leave old accounts open to increase the average age of your credit accounts.
By keeping these three metrics in mind, you can gradually improve your credit score. A simple combination of paying on time each month, keeping your revolving credit utilization below 30 percent, and allowing old accounts to remain open will help to raise your score over time. It’s also helpful to use a mixture of revolving and installment credit products to show good management of your debts.