Submitted by Rachel R on Mon, 02/02/2015 - 3:14pm
Credit scores determine credit card interest and impacts your finances
Image source: Flickr user Chris Potter
We all know that credit scores are three of the most important digits in our lives and that paying your bills on time will keep yours in good shape, but beyond that, how much do you actually know about how your credit score is calculated? Even if you always pay everything on time, your score may not be what it could and if you have to pick and choose between which bills you pay because money is tight, some choices will hit your credit score harder. Let's take a look first at the credit score calculation.
FICO scores are made up of five components:
Payment history – This makes up 35% of your score and is exactly what it sounds like. Prompt payments made for the full amount you're required to pay will keep this part of your score optimal.
Amounts owed – This makes up 30% of your score and if you owe too much in proportion to your earnings, this can impact your score. With credit cards, charging no more than 30% of your credit line will help keep your score highest.
Length of credit history – This makes up 15% of your score and the longer your accounts have been open, the better for your FICO score.
New credit – This makes up 10% of your score and can be tricky. You don't want to get overextended and take on more than you can pay, but taking selected new offers can keep your score climbing. But you have to be careful, because older accounts in good standing count for more of the calculation.
Types of credit – This also makes up 10% of your score and will be higher if you have a diversified credit portfolio. There are three main types of credit: installment, revolving and open.
What FICO doesn't care about
Accounts that didn't require a credit check to open them will usually not show up on your credit report unless the accounts go delinquent and they go into collections. Prepaid “credit” cards won't show up nor will your debit cards. Medical bills and utilities are also not usually reflected on your credit report unless you fail to pay and these debts are put into collections.
Ways to improve your credit score
Your credit score is more than just a number, it determines how much you'll pay for certain necessities that tie fees to FICO scores. This includes auto insurance, homeowners insurance and home security services. It's now common also for some auto rental firms to run a credit check. A higher credit score allows you to get lower interest rates on new credit which saves you money in the long-run. Here are three ways to improve your score:
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