How Your Credit Score is Made

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By now, you already know that your credit score is a big deal: it’s one of the most important numbers in your financial life and can impact anything from your ability to get a loan to landing your next job. But what exactly affects your credit score? While it’s technically impossible to measure the exact impact of a single transaction in your credit score calculation, we do know that there are 5 general categories that impact your credit score and how each are approximately weighted:

Payment History (35%)

Your payment history, or how consistently you pay your bills on-time (or late), has the greatest impact on your credit score. If you constantly miss payments or are frequently late paying your bills, you could seriously damage your credit score.

Amounts Owed (30%)

The amount you owe versus the credit that you have available to you will also significantly affect your credit score. For example, if you have a credit card limit of $1,000 and you consistently borrow up to that maximum amount, you may see a dip in your score. Try to keep your debt-to-credit available ratio under 50% - meaning that you only borrow up to 50% of what’s available to you on any line of credit.

Length of Credit History (15%)

How long have you had credit in your name? Depending on your answer to this question, your credit score could be positively or negatively impacted. The longer your credit history, the more positively it will impact your credit score. Don’t shred that old credit card you opened when you were 18-years-old just yet; it could actually improve your score.

Types of Credit (10%)

Your credit score is affected by the variety of credit you have in use, such as credit cards, installment loans, student loans and mortgages. The greater the variety, the most positively it will impact your score.

New Credit (10%)

Both applying for and opening a new line of credit can affect your credit score. Opening several lines of credit in a short period of time can actually signal to a creditor that you’re a potential credit risk. While this only makes up 10% of your credit score, it’s still smart to be careful when applying for or opening new accounts.

About Stephanie Halligan

Stephanie is the founder of The Empowered Dollar, a site dedicated to helping millennials to fix their finances and find their stride in money and life. When she's not blogging, Stephanie is designing school curricula and online games to teach students about smart money management.

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