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How is your credit score calculated?

By , CardRatings contributor
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According to insiders at FICO, one of the country's best-known credit scoring services, five areas of your financial life make up your credit score. Although the exact weight of each ingredient varies from person to person, they generally rank this way, from highest impact to lowest impact:

Your payment history

The largest piece of your credit score pie comes from your payment history. Every time you're late on a payment, your score drops a little. Rack up a combination of late payments over time, across multiple accounts, and your score can plummet. Those delinquent and default "dings" can stay on your report for a few years, even if you've completed balance transfers and closed the affected accounts.

How much you owe

Credit scoring algorithms determine your risk based on what you owe, compared to how much your current lenders are willing to let you borrow. Banks want to see that you're capable of managing monthly bills, not that you've managed to clear your balances. You'll actually earn a higher score by managing a small balance against a large credit line, compared to being completely-debt free. As your credit utilization goes up, across just one account or across your entire portfolio, you'll notice banks pulling back on their offers.

How long you've been borrowing

Your credit score reflects the length of time between the oldest account on your file and your newest credit relationship. Scoring algorithms can differ here, which is why you might notice conflicting ratings from FICO, Equifax, Experian and TransUnion. Most current credit scoring systems will give you points for your oldest account, whether or not it's still active.

How much new credit you've received lately

If accepted a new credit card deal in the past few months, you may notice a temporary dip in your credit score. Scoring algorithms assume that you need a few months to adjust to a new monthly bill, and that a sudden increase in available credit creates more risk for lenders.

Your overall mix of credit

Though the diversity of your accounts makes up a relatively small chunk of your overall score, you'll earn a higher score by showing you're capable of managing credit cards from multiple lenders, student loans, a home loan, and an auto payment.

Because your credit score doesn't necessarily account for your income or your savings, you may be surprised to see a disconnect between your actual ability to manage your finances and a credit bureau's numeric or letter grade score. Focus on improving each of these five areas, but don't obsess too much over trying to bump yourself up by one or two extra points. Banks make lending decisions based on where your score falls within an acceptable range, factoring in details like your employment history and purchasing power gleaned from their own data sources.

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