Your credit score is based on five main factors, each carrying a different level of importance:
1. Payment History (35%)
The most significant factor in your credit score is your payment history—whether you pay your bills on time. Late payments, defaults, foreclosures, and bankruptcies can severely damage your credit score, while consistent on-time payments help build a strong credit profile.
Tips to Improve: Pay all bills on time, including credit cards, loans, and utilities; and set up automatic payments or reminders to avoid missed payments
2. Credit Utilization (30%)
Your credit utilization ratio measures how much of your available credit you’re using. It’s calculated by dividing your total credit card balances by your total credit limits.
For example, if you have a $10,000 total credit limit and a $3,000 balance, your utilization is 30%—which is the recommended maximum for maintaining a healthy score.
Tips to Improve: Keep your credit utilization below 30% (ideally under 10%). Paying down credit card balances before your statement closing date is also a great way to improve your credit score. Also, explore the possibility to ask for a credit limit increase to lower your utilization ratio.
3. Length of Credit History (15%)
The longer your credit history, the better. This factor considers the average age of your accounts, as well as the age of your oldest and newest accounts. Lenders prefer borrowers with a long and well-managed credit history.
Tips to Improve:
Keep old accounts open, even if you’re not using them. Avoiding closing old credit cards also strengthens your credit score, as this can shorten your credit history.
4. Credit Mix (10%)
Lenders like to see a mix of different types of credit, such as:
Revolving credit (e.g., credit cards, lines of credit)
Installment loans (e.g., mortgages, auto loans, student loans)
A diverse credit mix shows that you can responsibly manage different kinds of debt.
Tips to Improve: If you only have credit cards, consider adding an installment loan (like a small personal loan) to diversify your credit profile. But please, avoid taking on unnecessary debt just to improve your credit mix.
5. New Credit Inquiries (10%)
Each time you apply for new credit, a hard inquiry is recorded on your credit report. Too many hard inquiries within a short period can lower your score, as it signals to lenders that you may be taking on too much debt.
However, soft inquiries, such as checking your own credit score or pre-qualifying for a loan, do not impact your credit.
Tips to Improve: Try to limit credit applications and only apply when necessary. If you’re shopping for a mortgage or auto loan, do it within a short timeframe (typically 14-45 days), as multiple inquiries for the same loan type are often grouped as one.
