The Components of Your Credit

There Are 5 Main Credit Categories

The importance of each category is based on your individual credit history. The importance of each factor listed on this page is based on a national average. The importance of these factors on your credit report may be different.

Approximately 35% of your score is based on your payment history.
The first thing any lender will want to know is whether you have paid past credit accounts on time. This is one of the most important factors in determining your credit score. However, late payments are not an automatic “score-killer.” An overall good credit picture can outweigh one or two instances of late credit card payments. By the same token, having no late payments in your credit report doesn’t mean you will get a “perfect score.” On average 60-65% of all credit reports show no late payments at all.

Determining Factors of Your Payment History

The types of your current credit accounts and/or loans are considered when determining your payment history score. The following information is part of your credit history
  • Major credit cards (Visa, MasterCard, American Express and Discover)
  • Retail accounts (credit from stores where you do business, such as department store credit cards)
  • Installment loans (loans where you make regular payments, such as car loans)
  • Finance company accounts
  • Mortgage loans
  • Public record and collection items – reports of events such as:
    • Bankruptcies
    • Judgments
    • Suits
    • Liens
    • Wage attachments
    • Collection items
These are considered quite serious, although older items will count less than more recent ones.

Accounts showing no late payments will increase your credit score.If you have late payments, public record or collection items, certain factors will be examined when determining how much these will affect your credit score. These factors include:
  • How late was each payment
  • How much was owed
  • How recently each late payment occurred and
  • How many late payments are there

Generally, a 30-day late payment is not as risky as a 90-day late payment, but current and frequent delinquencies count too. A 30-day late payment made just a month ago will count more than a 90-day late payment from five years ago.

Note: closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.

About 30% of your score is based on the amount you owe.
Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower and may not negatively affect your score. However, owing a great deal of money on many accounts can indicate that a person is overextended and is more likely to make some payments late or not at all. Part of the science of credit scoring is determining how much is too much for a given credit profile.

Determining Factors for the Amount You Owe

The amount you owe on all the above listed accounts will determine this part of your credit score. Even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.

  • In addition to the overall amount you owe, your score reflects the amount you owe on specific types of accounts, such as credit cards and installment loans.
  • In some cases, having a very small balance on your credit cards without missing a payment shows that you have managed your credit responsibly, and can raise your credit score more than having no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not generally raise your score.
  • Having many accounts with accumulated balances can indicate a higher risk of over-extension.
  • Being close to your credit limit on credit cards or “revolving credit” accounts can indicate a higher risk. Someone closer to “maxing out” on many credit cards may have trouble making payments in the future.
  • The amount you currently owe on installment loans compared to the original loan amount can raise your credit score. For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you are able and willing to manage and repay debt.
  • If any of these accounts show late payments, your score will go down.

About 15% of your score is based on your duration of your credit history.
In general, a longer credit history will increase your score. However, even people with short credit histories may get high scores depending on how the rest of the credit report looks.

Determining the Duration of Your Credit History

The score considers both the age of your oldest account and an average age of all your accounts, as well as:

  • When you first establish each line of credit
  • How long it has been since you used certain accounts

About 10% of your score is based on the pattern of your credit use.
According to Fair & Isaac, the creator of FICO credit score, opening several credit accounts in a short period of time does represent a greater risk for lenders providing additional credit. This risk is increased for people who do not have long-established credit histories. This risk extends to requests for credit*, as indicated by the number of inquiries to the credit reporting agencies. (An inquiry is a request by a lender to get a copy of your credit report.)

*Since many people today tend to shop for credit, your FICO score distinguishes between searching for many new credit accounts and interest rate shopping, which is generally not associated with higher risk. In part, this is handled by treating a grouping of inquiries – which probably represents a search for the best rate on a single loan – as though it was a single inquiry.

Determining Patterns of Credit Use

FICO’s score calculation considers:
  • How many new credit accounts you have based on the account type (for example, how many newly opened credit cards do you have).
  • How long has it been since you opened a new account. Again, the score looks at this by type of account.
  • Have you re-established a good credit history following past payment problems. Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a score over time.
  • Length of time since credit report inquiries were made by lenders.
  • How many recent requests for credit you have made, as indicated by inquiries to the credit reporting agencies.

Note: If you order your credit report from a credit reporting agency to check your report for accuracy, that inquiry does not count against you. This is considered a “consumer-initiated inquiry,” not an indication that you are seeking new credit. Also, an inquiry does not count when a lender requests your credit report in order to make you a “pre-approved” credit offer, or to review your account with them, even though these inquiries may show up on your credit report.

About 10% of your score is based on the type of credit you use.
According to the information provided by the Fair & Isaac, the creator of FICO credit score, about 10% of your credit score is based on:
  • What kinds of credit accounts you have
  • How many of each kind of credit

Determining the Type of Credit You Use

Your score is a complex formula that takes into account the types of credit accounts, their mix and the total number of accounts you have under your name.

Credit account types include:

  • Credit cards
  • Retail accounts
  • Installment loans
  • Finance company accounts
  • Mortgage loans

In general, the effect of how many accounts you have and their mix would vary with your income and other factors. It is not recommended that you open new accounts just to diversify your credit profile. This part of your credit score is more important if you do not have a lot of other credit information in your credit history or if you are just beginning to establish your credit.