What Goes Into Your Credit Score?

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If a friend asked to borrow $100, would you do it?

You’d likely ask yourself some key questions: Is this friend trustworthy? Have they borrowed money before? Did they repay it on time? These considerations form the foundation of lending, a practice as old as civilization itself. Before the rise of credit scores, lending was based entirely on personal relationships and trust. You either knew someone or had someone you trusted vouch for them. But as lending became a large-scale industry, banks and financial institutions needed a faster, more standardized way to determine who was creditworthy. This led to the creation of credit scores.

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In 1956, a company called Fair Isaac and Company (FICO) pioneered the first mathematical models to assess credit risk. By 1989, FICO had introduced the modern credit scoring system, which is now widely used by the three major credit bureaus: Equifax, Experian, and TransUnion. Your FICO score is a three-digit number ranging from 300 to 850, and it gives lenders an idea of how reliable you are when it comes to repaying debt.

Why Does Your Credit Score Matter?

Your credit score serves as a key indicator of your trustworthiness as a borrower. A high score (usually 700 or above) suggests to lenders that you’re likely to repay loans on time, which can qualify you for better interest rates, higher credit limits, and favorable terms on mortgages or auto loans. On the other hand, a low score (below 600) indicates a higher risk for lenders, meaning they may either deny you credit or charge significantly higher interest rates to compensate for that risk.

But here’s the thing: your credit score doesn’t tell the whole story of your financial health. It doesn’t measure whether you’re good at saving or budgeting. People with high credit scores might live paycheck to paycheck, while others with lower scores could have substantial savings but have chosen to avoid debt.

What Factors Determine Your Credit Score?

While the formula behind your credit score might seem mysterious, it’s actually based on five core factors. Here’s how they break down:

1. Payment History (35%): This is the biggest piece of your score. Lenders want to know if you’ve consistently paid your debts on time. Late payments, especially if they’re more than 30 days overdue, can severely damage your score. The good news? Over time, the impact of a missed payment lessens as long as you don’t continue to miss payments. Think of late payments like a broken bone—it may hurt for a while, but with responsible financial habits, it will eventually heal.

2. Credit Utilization (30%): This refers to how much of your available credit you’re currently using. For example, if you have a credit card with a $1,000 limit and you’ve spent $750, your credit utilization is 75%. The closer you are to your credit limit, the more risky you appear to lenders. Ideally, you want to keep your utilization below 30%, and some experts suggest staying under 25% to maximize your score.

3. Length of Credit History (15%): The age of your credit accounts plays an important role in your score. Generally, the longer your credit history, the better your score. This is why older people tend to have higher credit scores compared to younger individuals who are just starting to build their credit. Opening a credit card early and using it responsibly can be an effective strategy to build a strong score for the future.

4. Credit Mix (10%): Your score benefits from having a variety of credit types, such as revolving credit (credit cards) and installment loans (like student loans, car loans, or a mortgage). Lenders like to see that you can manage different types of debt responsibly. That said, it’s not worth taking on additional debt just for the sake of improving this part of your score.

5. New Credit (10%): When you apply for new credit, lenders will perform a “hard pull” or credit inquiry, which can temporarily lower your score. If you apply for multiple lines of credit within a short period, this can signal financial instability to lenders. However, there are exceptions: if you’re shopping around for a mortgage or car loan, multiple inquiries within a 30-45 day period are generally counted as one inquiry to minimize impact on your score.

Common Misconceptions About Credit Scores

One of the biggest misconceptions about credit scores is that they reflect your financial stability or how responsible you are with money. In reality, your score only reflects your past relationship with debt. It doesn’t account for your income, savings, or budgeting habits. So, someone with a high credit score could still be financially stressed, while someone with a lower score might be in a strong financial position but avoid using credit.

It’s also worth noting that not all credit checks are created equal. “Hard pulls,” which happen when you apply for credit, can impact your score, while “soft pulls,” such as when employers or insurance companies check your credit, don’t affect your score at all.

How Can You Check Your Credit Score?

You’re entitled to one free credit report every year from each of the three major credit bureaus (Equifax, Experian, and TransUnion). These reports detail your credit history but don’t always include your FICO score unless you pay extra. However, many credit card companies and auto lenders now offer free access to your FICO score as part of your monthly statement, so it’s easier than ever to stay informed about where you stand.

The good news is that checking your own credit score won’t hurt your score—it’s considered a “soft pull.”

The Bottom Line

While credit scores may seem like an impersonal way to judge your financial reliability, they’re essentially the modern version of having a good borrowing reputation. And just like in the old days, the same principles apply: try to borrow as little as possible, and always pay it back on time.

By keeping an eye on your credit utilization, paying your bills on time, and not taking on unnecessary debt, you’ll build a strong credit score that can help you achieve long-term financial goals—whether it’s buying a home, starting a business, or simply securing better loan terms.

And remember, your credit score is just one tool in your financial toolkit. It doesn’t define your overall financial health, but managing it wisely can open doors to a more secure financial future.