Having the right tools to build up your credit score is vital to maintaining a healthy credit profile. But what if you don’t understand how your credit score is made up?

Your credit score is calculated through a few different factors, and how it’s made varies based on different scoring systems. There’s FICO and VantageScore — two of the most popular scoring items. While they aren’t the same methods, they do have a lot in common on how their scores are calculated, including:

  • Your payment history
  • Your credit utilization 
  • The length of your payment history
  • The type of credit accounts you have
  • New credit

How much each factor matters is based on different scoring models. But here’s a general idea of the importance of each credit score element.

Payment history

Your payment history is the biggest determining factor in how your credit score is calculated. For FICO scores, it makes up 35%.

The reason why payment history is so important is because it shows lenders how responsible you are with paying back your debt on time. The more on-time payments you make, the higher your scores goes. 

It also works the other way. The more missed payments you have, the lower your score drops. If you have many lapsed payments, and anything that has gone into collections or default, your score will negatively reflect that.

Payment history includes your payments for credit cards, student loans, and any other type of loan or revolving credit. It also includes bankruptcies, foreclosures and anything that has been sent to collection agencies.

Credit utilization

Your credit utilization, or the amounts you owe, make up 30% of your score. This is the amount of credit you owe verses the amount of credit you have available to you. The lower your credit utilization, the lower risk you are to lenders. 

The higher your credit utilization, the more risky you are to lenders. Banks see high credit utilization as risky because you’re spending more than you’re paying back. 

The length of your credit history 

The longer you’ve had established credit, the more responsible you look to lenders. The length of your credit history makes up 15% of your score. 

While you may expect that the older you are, the longer your credit history is, but that’s not exactly true. If you take out student loans when you’re 18, you’re establishing your credit early on. The same goes for opening a credit card account in high school, even if you have a parent as a cosigner. Having your name on a credit card or loan early on can help you start your credit history early. 

You may think about putting off getting a credit card until you’re older, but you may want to get one as soon as you’re able to afford it. Making on-time regular payments every month can help you establish credit not only in responsible payments but also starting your credit history sooner rather than later.

Type of accounts

The type of credit accounts you have, or your credit mix, matters to credit bureaus. Having a variety of different credit accounts makes you more valuable. It means you can handle various types of credit while still being able to pay your balances on time every month. Types of accounts can include:

Having a variety of different accounts appeals to creditors, so try to have a few different accounts under your name.

New credit

While new credit only makes up 10% of your overall score, it’s both a blessing and a curse.

New credit is good for helping build up your score by expanding the type of accounts you have and growing your available credit. But try not to have too much of a new thing. 

Applying for new credit can cause hard inquiries to your credit report, which can temporarily cause your score to drop. While it will recover in a few months, it also changes how your score is calculated. The average length of your credit age, or the average age of your open accounts. 

Having a low average age of your open accounts isn’t terrible, but if you’re applying for new credit, like a mortgage, it may hurt your chances of getting the best-possible interest rate. Try applying for new credit when you need it, rather than when you feel like it. Also try to keep your new credit applications low, less than two is ideal.

Bottom line

While credit score calculations are slightly different depending on which company is doing the scoring, they’ve got the basic principles in mind. On-time payment history is going to be the biggest factor in calculating your score. Then how much credit you use. Followed by the length of your credit history, the types of credit you have and new credit you’ve started.