Five Credit Score Elements

Five Credit Score Elements

1. Payment history: 35% of the total credit score.

Repaying past debt is the most important factor in calculating credit scores. According to FICO, past long-term behavior is used to forecast future long-term behavior. FICO tracks both revolving loans, for instance, credit cards, and installment loans, such as mortgages or student loans. Although the weight of each loan varies between individuals, defaulting on a larger installment loan like a mortgage will damage a credit score more severely than defaulting on a smaller revolving loan. One of the best ways for borrowers to improve a credit score as a whole is by making consistent, timely payments.

2. Credit utilization: 30% of the total credit score.

Credit utilization is the percentage of available credit that has been borrowed. To maximize a credit score, maintain low credit card balances, especially in relation to maximum credit limit per card. Borrowers who habitually max out credit cards are considered people who cannot handle debt well. FICO says people with the best scores tend to average about 7 percent credit utilization ratio, but that 10 to 20 percent usage is OK. That rule of thumb applies to each individual credit card as well as the overall level of debt.

3.

Length of credit history: 15% of the total credit score.

Length of credit is based on the length of time each account has been open and the length of time since the account's most recent action. It takes time to build strong credit scores because a longer credit history provides more information and offers a better picture of long-term financial behavior. Also, this means canceling a card that is no longer used can hurt your credit score and it might be better to just leave it open and not use it, although there is a risk if identify