Know Some Factors that Affect Credit Score

Now that we know what credit scores are out there and what makes a good and bad score, let’s explore the variables that make up your score more in depth. Given FICO’s dominance, we’ll focus specifically on what makes up your FICO credit score.

Here’s the breakdown of how your credit score is calculated, according to FICO:

  • Payment history, 35%: Your payment history tells potential creditors whether you’ve paid your bills on time. Foreclosures, collections, bankruptcies and the like will also cause your credit to take a hit here, if applicable. Your score will reflect how late you were making payments, how many times you’ve been late, how much you owed, and how recently you missed them.
  • Amounts owed, 30%: If you’ve used too much of your available credit, that signals to potential creditors that you could be spreading yourself too thin. How much you owe on all of your accounts versus your total credit limit — as well as what you owe on certain types of accounts, such as credit cards versus installment loans — are among the factors that can affect your score in this category.
  • Length of credit history, 15%: A long credit history makes you less risky to potential creditors than someone who has only recently opened their first credit accounts. Your credit score reflects the age of your accounts as well as how long it’s been since you’ve used them.
  • New credit, 10%: Opening too many new credit accounts at once can hurt your score. So can too many inquiries into your credit when you’re shopping for a credit account.
  • Types of credit, 10%: Potential creditors like to see a variety of credit accounts instead of just one type. In particular, they like to see both revolving credit lines, which allow you to borrow money again and again after repaying it (such as credit cards), and installment debt, or a loan disbursed in a lump sum and repaid in fixed payments for a fixed period of time (such as a car loan or student loan).

How Do I Build Good Credit?

If you’re starting from ground zero with very little or no credit history, there are certain steps you can take to make your credit shine in as short a time as possible.

Perhaps you’re just starting out and haven’t thought much about your credit yet, but know you want to be as proactive as you can and lay the groundwork for a good credit score. Here are some tips on how to do that responsibly.

Learn how to manage ‘real money’ first

Before you open any credit accounts, you should be adept at budgeting. That includes using a checking account to pay regular expenses without incurring overdraft fees, and using a savings account to start building an emergency fund.

A debit card that’s linked to your checking account is as convenient as a credit card without the responsibility of the monthly bills, or you can opt for a prepaid card. Just beware of fees if you go this route, and check out our guide to the best prepaid debit cards before you pick one.

Start small with a credit card designed for first-timers

The Simple Dollar recommends several special types of credit cards that can help you build your credit without risking too much debt.

  • Student credit cards can teach financial responsibility, often with more forgiving terms and fees than other credit cards. Your credit limit will probably be low, and you may need to have a parent co-sign your application. Check out our own recommendations if you’re shopping for the best credit cards for students.
  • Secured credit cards require you to deposit a certain amount of cash in order to open an account. The card issuer can then use this deposit as collateral in case you don’t pay your bill. A secured credit card won’t have the perks of many other cards. You’ll also want to double-check that your card activity will be reported to credit bureaus, which is the only way you’ll be able to build your credit history. We offer a few recommendations on secured credit cards in our guide to the best credit cards for bad credit.
  • Retail credit cards may be an option because they have low limits and are often relatively easy to qualify for, but they also have high interest rates that make them better suited for when you’re more comfortable — and responsible — with credit cards.

Add another kind of credit to the mix

Once you’re feeling more comfortable with your new credit card, diversifying your credit can start to raise your score. You can apply for a small personal loan at your bank and pay it back quickly, or opt for an installment loan, such as a car loan or a student loan — but only if you really need it and can afford to pay it back.

Maintain good credit habits

Good credit habits start with the basics of budgeting, spending, and paying on time.

Paying your bills on time is the number one rule. However, getting in the habit of making more than the minimum payment due is also a good practice. This helps you pay off your loans faster over time. Even paying just a little bit more than you need to can save you a lot in interest.

Your credit utilization is also important to understand. As you become more experienced with credit, your card issuer may raise your credit limit. But just because you’re suddenly allowed to charge $5,000 doesn’t mean you should.

A good rule of thumb is to use less than 30% of your credit limit to build a healthy credit score. That means keeping your monthly balance under $1,500 if your credit limit is $5,000