What Determines My Credit Score?

While the concept of financial responsibility can be daunting, there are only five factors that need to be considered when understanding your credit score. The following chart shows the five factors weighted by their level of impact on your credit score.

Payment History (35%)
The most significant factor in the weighting of a credit score is Payment History. Payment history is a collective record of any bills and services you are using credit for. The most important habit to build for having a strong payment history is paying your bills on time every time! Late payments are noted on your payment history, and repeated late payments will have a strong negative impact while consistent on time payments will have a positive impact on your score. 

Amounts Owed / Credit Utilization Rate (30%)
The second factor in credit score is Credit Utilization. Utilization is simply the percentage of credit you borrow/use from your revolving credit at any point in time. Utilization is measured based on each credit card's credit limit, so it is important to monitor the amount you are spending on each card, as maintaining a high balance will have a negative impact on your credit. The general rule of thumb for credit utilization is to avoid going over 30% of your card's limit. This metric can create pitfalls for young adults with low credit allowance, as for example if your card's allowance is $1000 any spending past $300 will hurt your credit score.

Credit Length (15%)
The third factor of credit score is Credit Age. While it's not recommended that you rush into opening a credit account if the proper research and preparation hasn't been done, once you have an account opened the score will passively increase over time as the account gets older. This system is put in place to distinguish older accounts from newer accounts as people with older accounts are more likely to be a reliable investments for lenders.

Types of Credit (10%)

The fourth factor of credit score is Credit Mix. Credit mix is having a strong diversity between revolving credit like credit cards and installment credit like home and auto loans. The importance of credit mix in your credit score is that it gives the perception that you are able to manage different types of obligations responsibly.

New Credit (10%)
The fifth factor of your credit score is New Credit.  When applying for a loan, lenders will be prompted to check your credit score. Depending on what you are applying for there will be a Hard Inquiry which does has an impact on your credit score. This is because the credit rating agency doesn't yet know how you will handle the new account.  This drop is typically temporary. 

Note that when you check your credit, this is a Soft Inquiry which has no impact on your credit. When considering applying for a new account, you can also request a pre-approval which also uses a soft inquiry while you are exploring.  However, if you decide to proceed with applying for an account, there will be a hard inquiry before the account is issued. Too many hard inquiries in a short period can damage your credit score, however, when shopping around for things like an Auto Loan or Mortgage, all of the inquiries within a 45 day period are grouped as one inquiry to limit the impact and allow you to shop around for the best loan for your purchase.