Credit Score Factors - What Factors Determine My Credit Score?

Knowing your credit score factors -- that is, what factors determine your credit score, is integral knowledge if you aim to increase your credit score.

Just as to lose weight, you must know what factors play into how much you weigh, to maintain a healthy credit profile it is vital that you understand what variables influence your credit score.

Firstly, let's clear the air just a little bit. There are many banks or other institutions with their own formulas for computing their own individual credit scores. Those scores are unique to the companies which have created them, and they are not the subject of this article.

The score that we will be discussing in this article is known as the Fico score. This formula is used by the three major credit reporting agencies: Experian, TransUnion, and Equifax.

Fico Score is also the score that most people are concerned with, as it has a heavy impact on one's life. How much you pay for your mortgage or even whether or not you get a job are just a couple of the things that this important number can influence.

So, how does the Fico Score work? It is a complex algorithm which uses many variables to determine your overall credit score, but the end result is the same: it gives a number between 300 and 850; the higher, the better.

Because your credit score is such a complicated number, in this article we will be focusing on only the most important factors that play into your score.

The Most Important Factor: Your Payment History and the Presence of Collections or Judgements

First of all, I want to talk about collections and judgements. The presence of these extremely negative entries on your credit report is very serious. It is extremely difficult to have a high credit score with either of these things on your record.

Beyond collections or judgements, your payment history for your credit cards and installment loans has a drastic effect on your credit score. A perfect payment record over a long period of time goes a long way towards increasing your credit score. Conversely, having a spotty payment record can very quickly destroy an otherwise good rating.

As far as your credit report is involved, only payments which are overdue by 30 days or more are reported to the credit bureaus. For instance, if you are ten days late on your credit card payment, this late payment will not be reflected on your report (although applicable late fees will still apply). If you are 32 days overdue, then the infraction will be listed on your credit history as a 30 day late.

The Second Most Important Credit Score Factor: Debt to Credit Limit Ratio

This criteria is almost equally as important as your payment history, yet it is far more often overlooked by those who want to improve their credit scores. This ratio mostly pertains to your outstanding credit card debt.

Calculating your debt to credit limit ratio is simple. Simply divide your total debt by your total credit limit. For example, to calculate your debt to credit limit ratio on a credit card which has a credit limit of $10,000 and a current balance of $5,000, you would divide $5,000 by $10,000 like so: $5,000/$10,000. The resulting number is 0.5, or 50%, meaning your debt to credit limit ratio for that particular card is 50% or 1:2.

There is some confusion in this area about whether or not the balance of each credit card is significant. The answer is that it is not. All that matters as far as your credit score is concerned is your overall debt and your overall credit limits.

Many people falsely believe that they are penalized for having one credit card nearly maxed out, even if their overall ratio is quite low. This is not the case; therefore it makes the most sense to pay off your higher interest rate cards first, instead of your higher balances first (many people use the opposite strategy).

The Third Most Important Credit Score Factor: Age of Credit History

This criteria for calculating your credit score is not quite as important as your payment history or your debt ratio. However, it still has heavy implications towards your overall credit score. Unfortunately, it is something that is out of the control of most people, but it also means that your credit will automatically improve as your accounts (and yourself) age.

The key to understanding this factor is that it is your average age on your account that matters most. Therefore, an influx of new accounts will hurt your average age. Having many old accounts is much more beneficial than having just one.

For this reason, closing old credit cards can lower your score significantly.

Pro tip: If a card goes "inactive" for a long period of time, it can be "discounted" even though it still remains on your credit file. Not using your oldest cards at all can therefore hurt your credit score. A good practice is to try and charge at least a small item to your oldest cards at least once a year.

There are many other factors with varying degrees of importance to your credit score and your life, but I've found that focusing on these three "biggies" alone goes a long way towards improving your credit score.

Remember, lenders want you to be a good candidate for a loan -- it is best to work with them, rather than against them. Follow that simple ethos, and you will get what you want out of life and loans!