How Credit Scores Actually Work

Your credit score is one of the most consequential numbers in your financial life, it determines your mortgage rate, your car loan rate, sometimes whether you can rent an apartment, sometimes whether you get a job. Most people don't actually understand what moves it. Here's the breakdown.

The five factors (and their weight)

FICO, the most widely used scoring system, weights five factors:

1. Payment history, 35%. Have you paid your bills on time? This is the single biggest factor by a wide margin.
2. Credit utilization, 30%. How much of your available credit are you using right now?
3. Length of credit history, 15%. How long have you had credit accounts open, on average?
4. Credit mix, 10%. Do you have different types of credit (cards, loans, mortgage)?
5. New credit, 10%. Have you opened new accounts recently?

The two that actually matter

Payment history and utilization together make up 65% of your score. Optimize these two and the other three barely matter.

Payment history

The only rule: never miss a payment. A single 30-day-late payment can drop your score by 50-100 points and stays on your report for 7 years. Auto-pay the minimum on every credit card you have. You can pay extra manually if you want, but the auto-pay safety net catches you on the months you forget.

Utilization

Your utilization is the percentage of your credit limit that you're currently using. If you have a $10,000 limit and a $3,000 balance, your utilization is 30%. The score rewards low utilization:

• 0-9%: best
• 10-29%: good
• 30-49%: ok
• 50-74%: bad
• 75%+: terrible

The trick: utilization is calculated on the day your statement closes, not when you pay. So you can use your card all month and pay the balance before the statement closes, your reported utilization will be near zero.

Or, more practically: ask for credit limit increases periodically. A higher limit with the same balance lowers your utilization automatically without changing anything else.

Length of history

The longer your accounts have been open, the better. This is why closing old credit cards is usually a mistake, you shorten your average account age and lose history.

You can't speed this up. Just be patient and don't close old cards.

Credit mix

FICO likes to see that you can manage different types of credit, revolving (credit cards) and installment (auto loans, mortgages). A perfect score requires having both. But: don't take out a loan you don't need just to "improve your mix." The boost is small and not worth the cost.

New credit

Every time you apply for credit, a "hard inquiry" appears on your report. Each one drops your score by ~5 points and stays on for 2 years (though FICO weighs them less after 12 months). Multiple inquiries in a short period look like financial distress.

Exception: rate-shopping for mortgages or auto loans within a 14-45 day window counts as a single inquiry. So you can shop around for the best rate without hurting your score multiple times.

What does NOT affect your score

People worry about the wrong things. These do not affect your credit score:

• Your income
• Your savings or net worth
• Your job title
• How much you have in checking
• Checking your own credit score (this is a "soft inquiry", no impact)
• Your debit card use
• Most utility and rent payments (unless you specifically opt in to reporting)

The simple action plan

1. Set up auto-pay on every credit card to the minimum. Never miss a payment again.
2. Pay off balances before the statement closes when possible, to keep reported utilization low.
3. Don't close old credit cards.
4. Don't apply for new credit unless you have a specific reason.
5. Check your credit report annually for errors at annualcreditreport.com (the only legitimate free source).

That's it. Five rules. Follow them and your credit score will be 750+ within a few years. Excellent credit is more about not screwing up than about clever optimization.