The Elements of a Credit Score

Credit scores rely on complex mathematical algorithms to evaluate your credit report data and predict your risk. Luckily, these complex inner workings can be broken down into five fairly easy to understand categories.

Each category contributes a set percentage to your overall credit score. At the same time, each different category represents a different percentage, so some categories carry more weight than others. For example, your payment history is more important than how often you apply for new accounts. Here's how the credit score categories break down:

Credit Score Categories

Payment History: 35% — The largest credit score category covers your payment history for the past 7-10 years. Each of your credit card and loan payments is reported each month and kept archived on your credit report. Negative items such as collection accounts, bankruptcies, judgments, tax liens, and other public records are all included in this category of your credit score. Lesson: Always pay your bills on time.

Debt Utilization: 30% — The next biggest credit score category is also the most commonly misunderstood. This section evaluates how much of your credit card limits you are currently using. Appearing "maxed out" can damage your score significantly. Only use between one and ten percent of your total credit card limits each month for the maximum score points in this score category. Lesson: Keep your debt balances low.

Account Age: 15% — The amount of time you've been using credit counts for the next fifteen percent of your score. Keeping your credit and loan accounts open for seven or more years can help you earn the most points in this category. And be sure to actively use your existing accounts to keep fresh data coming into your credit reports. Lesson: Don't close old accounts.

Account Mix: 10% — You'll earn a few extra credit score points by having a mix of loan and credit accounts on your credit report. Having a credit card, mortgage, student loan, and auto loan all at the same time will earn you all of the points for this small category. Of course, this isn't always realistic. Don't worry if you don't have each of the account types; this category only makes up ten percent of your score.Lesson: Account diversity is good thing.

Inquiries: 10% — Your recent record of applying for new credit and loan accounts makes up the final ten percent of your credit score. Only hard inquiries — when your credit is checked for a loan, credit card, utility, or bank account application — are included in this category. Soft inquiries from checking your own credit or credit card pre-approval don't impact your score. Lesson: Apply for credit in moderation.

Next time you check your three credit scores and three credit reports, look to see how you're doing in each of these five credit score categories.