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What Makes Up Your Credit Score

What Makes Up Your Credit Score

Americans treat credit scores like a personal competition where higher credit scores bring bragging rights in the financial game of life.  However, few know exactly what goes into a credit score and why it is important to lenders.  Here is a breakdown of what goes into a credit score, along with one GIANT myth that must be dispelled! 

Who Creates Your Credit Score 

Your credit scores are determined by the two major credit scoring companies:  FICO (FKA Fair Isaac) and VantageScore.  These two companies gather information from the three major credit reporting companies (Equifax, Experian and TransUnion).  The credit scoring companies take information from credit reports and run that data through a scoring rubric that spits out a number, that number is your own personal credit score. 

What Makes Up a Credit Score 

Credit scores from both credit scoring companies are made up of essentially the same information.  Although each company has a different proprietary scoring calculation.  The 5 key components from highest influence to lowest are:  payment history, credit usage, credit history/experience, credit mix, and new accounts opened. 

What is Payment History 

Payment history is the most influential portion of the credit score.  It is the track record of payments the borrower has made over the course of the existence of the loan/credit card.  Late payments and non-payments are a killer.  Even if you don’t pay the full amount on credit cards each month, as long as you pay the minimum required payment, it counts as an “on-time” payment.  Think about it, the credit card companies don’t want to punish you for minimum payments, they like it when you pay interest, it is more money for them.  The key here is to make sure to make all payments on time (whether in full or the minimum required). 

What is Credit Utilization 

This is simply the ratio between how much credit you have (e.g. your credit limit on a credit card or credit line) and how much you use, or the balance on the card/credit line.  The higher your utilization ratio, the lower your score in this category.  The key is to use the credit, but not abuse the credit.  Remember, the credit scoring companies want to see credit history, so it helps your credit score when you use your available credit.  However, this is where the GIANT myth mentioned earlier comes from. 

Over the course of our careers as financial advisors, we’ve been told many times by clients that they keep an unpaid balance on their credit card(s) to try to earn a higher credit score.  This is a widely held belief by much of the American public and it is categorically FALSE! 

In short, keeping a balance on your credit card will do only one thing for you, increase your balance due and cause you to pay more.  Using your credit card and paying it off is good for your credit score, keeping a balance does nothing!  Please consider this your official permission slip to pay off your balance in full each month. 

What is Credit History/Experience 

This one is simple, it is based on how long your credit accounts have been open.  The credit scoring companies look at the oldest, newest and average account ages of your credit accounts.  The key here is to make sure you keep credit accounts for a long time.  Often a suggestion to start this “credit clock” is to open a secured credit card early in your financial life (e.g. in college, or when you get your first job), or to have a parent put you as an authorized user on one of their credit cards. 

What is Credit Mix 

This metric is based on the types of credit accounts you have.  There are two types of credit accounts:  revolving and installment.  Revolving accounts include:  credit cards, gas cards, retail store cards, and Home Equity Lines of Credit (HELOCs).  Installment accounts include:  mortgages, car loans and student loans.  Revolving accounts usually have more flexible payment terms (e.g. minimum credit card payments) and installment accounts likely have fixed payment terms.  Having a mix of both types shows the credit scoring companies that you can pay both ways. 

How Does Applying for Credit Affect My Score

Most of the conventional wisdom here is correct.  If you open a bunch of credit accounts at the same time, it’s going to lower your credit score.  It will also affect your credit utilization ratio and credit history, which can help or hurt you depending on how you use the new credit.  This is also where being careful about having your “credit pulled” by multiple lenders can be a detriment to your credit score. 


Credit scores are made up of several factors, all of which are under your control, so just be mindful about how you use the credit you have and the credit you apply for and you will be just fine.  Now that you’re armed with this information, here’s hoping the next time you’re comparing your score to a friend, you beat their score handedly.