What Makes Up Your Credit Score

A credit score isn't one measurement, it's a weighted combination of several different factors, each contributing different weight to the final number. Understanding what each factor covers, and just as importantly, what it doesn't cover, makes it much easier to know where to focus.

Payment History Carries The Most Weight

Payment history makes up nearly 35 percent of a FICO score, more than any other single factor. It tracks whether payments on credit cards, loans, and other accounts were made on time, and how recently and how often any late payments happened. A single payment thirty or more days late can drop a score noticeably, and the impact lingers for years even after the account is brought current.

Amounts Owed

Amounts owed makes up about 30 percent, and this is mostly about credit utilization, the percentage of available revolving credit currently in use. Carrying a high balance relative to a credit limit weighs on the score even when payments are made in full every month, since utilization is measured on a snapshot basis rather than an average over time. A balance below 10% of available credit is excellent. From 11% - 30% is still good, but better to be near the lower ratio. Above 30% starts to negatively impact your credit score to a greater degree. Believe it or not, 0% isn't ideal. The scoring algorithm favors responsible use, not inactivity.

Length Of Credit History

Length of credit history accounts for about 15 percent. This factor looks at how long accounts have been open, the age of the oldest account, and the average age across all accounts. It's part of why closing an old, unused credit card can sometimes lower a score, the account's age was contributing to the average even if it wasn't being used. Insted of closing the card, you could simply disable it (turn it off for use), which is a feature in most banking apps.

New Credit

New credit makes up about 10 percent. Applying for several new accounts in a short window generates multiple hard inquiries and signals higher risk to lenders, even if every application gets approved. A single inquiry has a small, short-lived effect, but several close together can add up.

Credit Mix

Credit mix rounds out the last 10 percent. It reflects whether a credit history includes a variety of account types, revolving credit like credit cards and installment credit like auto loans, student loans, or mortgages. It's a smaller factor, and it's not a reason to open an account that isn't needed just to diversify the mix. This is why some people see a small dip in their score after paying off a car or even their home. That will recover quickly, but it surprises people initially.

What Doesn't Factor In At All

Two things trip people up regularly, and neither one is part of the calculation. Income isn't a factor in a credit score, no matter how high it is. Credit bureaus don't receive income information as part of the scoring process, so a high earner with missed payments or maxed-out cards can carry a lower score than someone earning far less who pays on time and keeps balances low. Lenders may ask about income separately when underwriting a loan, but it has no bearing on the score itself.

An Early Payment Isn't The Same As Paying Off Early

There's a difference between making a scheduled payment early and paying off the loan itself ahead of schedule, and the two affect a credit score differently. Making a single payment a few days before it's due doesn't add any extra benefit, on time is on time whether it happens on the due date or a week before it. Paying off the loan itself early, reducing or eliminating the balance ahead of the original schedule, does help, since it lowers the total debt being carried and removes any future risk of a missed payment on that account. The single factor that matters on each individual payment is avoiding a late one, but paying down or off the balance ahead of schedule benefits both the score and the interest saved along the way.

Knowing Where To Focus

Payment history and utilization together make up nearly two-thirds of a credit score, which makes them the two factors that deserve the closest regular attention. Length of history and credit mix mostly take care of themselves over time. New credit only becomes a factor when several applications happen close together. None of it responds to income. Making an individual payment early doesn't move the needle either, but paying down or paying off the loan itself ahead of schedule does, since it reduces the total balance being carried.

Jay Sexton is a finance instructor, doctoral candidate in Personal Financial Planning, and owner of Sexton Finance. He writes about the behavioral and emotional dimensions of financial decision-making at sextonfinance.com.