What are 3 factors that determine a credit score?

Your credit score is a three-digit number that's used to predict the likelihood that you'll pay your credit obligations on time. The score generally ranges from 300 to 850 and is calculated using credit history information from your credit report.

Your accounts, payment history, and inquiries into your credit are examples of credit report information used to calculate your credit score.

When you apply for a credit card or loan, the creditor or lender uses your credit score to inform their decision on whether to issue you credit or not. The credit score gives a snapshot of how reliable you are as a borrower, which lets lenders know whether you are a good risk for a loan or credit card or not.

Lenders aren't the only ones who check credit scores, however. Your utility company, landlord, and cell phone company may all check your credit score to get a picture of how reliable and financially stable you are.

Creditors and lenders also use your credit score to set the pricing and terms for your credit card or loan. Having a higher credit score will help you qualify for lower interest rates on credit cards and loans. Having no credit history or lower credit scores will result in being offered higher interest rates, which are ultimately more expensive.

These higher interest rates are designed to lower the risk that lenders take on by offering loans or credit cards to less reliable borrowers.

While there are several different versions of the credit score, the most commonly used version is the FICO score. Developed by FICO, formerly Fair Isaac Company, the FICO score is used by many creditors and lenders to decide whether or not to extend credit to you. According to myFICO.com, the consumer division of FICO, there are at least 10 different FICO scores used for varying purposes.

The VantageScore, which was created by the three credit bureaus, is another common credit score. Many free credit score services offer the VantageScore 3.0.

Because some parts of your bill-paying history are more important than others, different pieces of your credit history are given different weights in calculating your credit score.

Even though the specific equation for coming up with your credit score is proprietary information owned by FICO, we do know what information is used to calculate your score.

Payment history: Lenders are most concerned about whether or not you pay your bills on time. The best indicator of this is how you’ve paid your bills in the past.

Late payments, charge-offs, debt collections, and bankruptcies all affect the payment history portion of your credit score. The better your history of paying debts—such as loan payments or credit card bills—on time, the higher your credit score.

More recent delinquencies hurt your credit score more than those in the past.

Amounts owed: The amount of debt you have in comparison to your credit limits is known as credit utilization. The more money you already owe, the less flexible your spending is, which makes it riskier for you to take on new debt, which lowers your credit score.

Keep your credit card balance at about 30% of your credit limit or less to improve your credit score.

Length of credit history: Having a longer credit history is favorable because it gives more information about your spending habits. A longer history of reliable borrowing means your score will be higher.

Keeping accounts open for a long time will lead to higher credit score. However, you can still have a high credit score, even if you are a new borrower, if you have low amounts of debt and a history of on-time payments.

New credit: In general, people who open many new credit accounts in a short amount of time are seen as riskier borrowers. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble.

Credit mix: Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score.

Opening new accounts can hurt your credit score by adding new inquiries to your credit report or lowering your average credit age. Open new accounts as you need them, not to simply have what seems like a better mix of credit.

Checking your credit score helps you predict how borrowers will view your applications for credit cards or loans. If you see that your credit score is lower than you want, you have an opportunity to improve your score before you take major financial steps, such as applying for a mortgage.

Avoid sites that claim to provide a free credit score if they mention a trial subscription or ask for your credit card information. You may be charged within a few days if you don't take some action to stop the trial.

You can check your own credit score, and you should, through any of a variety of services. There are online sites that offer free credit scores. If you have a checking account, many banks will also offer customers a chance to monitor their credit scores through their online accounts.

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Although there are many credit-scoring models, the goal of these formulas is to figure out your credit risk — that is, the likelihood of you paying your bill on time, or even at all. And whether you’re looking at a FICO® or VantageScore® credit score, your scores are based on the same information: the data in your credit reports.

While various credit-scoring models may treat factors differently, the leading models, FICO® and VantageScore®, place similar relative importance on the following five categories of information. We’ve ranked them by which ones are often most important to the average consumer.

1. Most important: Payment history

Your payment history is one of the most important credit scoring factors and can have the biggest impact on your scores.

Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them. The effects of missing payments can also increase the longer a bill goes unpaid. So a 30-day late payment might have a lesser effect than a 60- or 90-day late payment.

How much a late payment affects your credit can also vary depending on how much you owe. Don’t worry, though: If you start making on-time payments and actively reduce the amount owed, then the impact on your scores can diminish over time.

If you’re having trouble making payments at all, you could also wind up with a public record, such as a foreclosure or tax lien, that ends up on your credit reports and can hurt your scores. Sometimes a single derogatory mark on your credit, such as a bankruptcy, could have a major impact.

Credit usage is also an important factor, and it’s one of the few that you may be able to quickly change to improve (or hurt) your credit health.

The amount you owe on installment loans — such as a personal loan, mortgage, auto loan or student loan — is part of the equation. But even more important is your current credit utilization rate.

Your utilization rate is the ratio between the total balance you owe and your total credit limit on all your revolving accounts (credit cards and lines of credit). A lower utilization rate is better for your credit scores. Maxing out your credit cards or leaving part of your balance unpaid can hurt your scores by increasing your utilization rate.

Sarah Davies, senior vice president of analytics, research and product management at VantageScore, says that for VantageScore® credit scores, your overall utilization rate is more important than the utilization rate on an individual account.

But utilization rates on individual accounts can also affect your credit scores. This means you should pay attention to not just your overall credit utilization, but also the utilization on individual credit cards. Having a lot of accounts with balances might indicate that you’re a riskier bet for a lender.

Keep in mind that you can pay your bill in full each month and still appear to have a high utilization rate. The calculation uses the balance that your credit card issuers report to the credit bureaus, often around the time it sends you your monthly statement. You may have to make early payments throughout your billing cycle if you want to use a lot of credit and maintain a low utilization rate.

3. Somewhat important: Length of credit history

A variety of factors related to the length of your credit history can affect your credit, including the following:

• The age of your oldest account
• The age of your newest account
• The average age of your accounts
• Whether you’ve used an account recently

Opening new accounts could lower your average age of accounts, which may hurt your scores. But the hit to your scores could also be more than offset by lowering your utilization rate and increasing your total credit limit, making sure to make on-time payments to the new card and adding to your credit mix.

Closed accounts can stay on your credit reports for up to 10 years and increase the average age of your accounts during that time. But once the account drops off your credit reports, it could lower this factor, and hurt your scores. The impact could be more significant if the account was also your oldest account.

Having experience with different types of credit, like revolving credit card accounts and installment student loans, may help improve your credit health.

Since your credit mix is a minor factor, you probably shouldn’t take out a loan and pay interest just to add to your credit mix. But if you’ve only ever had installment loans, you may want to open a credit card and use it for minor expenses that you can afford to pay off each month.

Creditors may review your credit reports and scores when you apply to open a new line of credit. A record of this, known as a credit inquiry, can stay on your credit reports for up to two years.

Soft inquiries, like those that come from checking your own scores and some loan or credit card prequalifications, don’t hurt your scores.

Hard inquiries, when a creditor checks your credit before making a lending decision, can hurt your scores even if you don’t get approved for the credit card or loan. But often a single hard inquiry will have a minor effect. Unless there are other negative marks, your scores could recover, or even rise, within a few months.

The impact of a hard inquiry may be more significant if you’re new to credit. It can also be greater if you have many hard inquiries during a short period.

Don’t be afraid to shop for loans, though. Credit-scoring models recognize that consumers want to compare their options, so multiple inquiries for certain types of loans, like mortgage loans, auto loans and student loans, may only count as one inquiry. You typically have 14 days to shop for these kinds of loans. And though it could be longer depending on the scoring model, you may want to stick to getting rate quotes within those 14 days since you probably won’t know which model is being used to generate your score.

Bottom line

There are many credit scores, and you may not know which one a lender is going to use when considering your application. But consumer credit scores, which are determined based on the information in your consumer credit reports, weigh factors in a similar manner. If you focus on improving these factors, you could improve your credit health across the board.