How Credit Scores Work


Consumers from all walks of life stress out about one thing -- credit scores, and with good reason. Whether it's a college education or a beach house to retire in, one little number will determine whether you can finance your dreams. The first step to keeping your credit high is understanding how it works. Here's our guide to credit scores.

What it is

Credit scores are numbers designed to represent how financially reliable consumers are. Based on a scale ranging from 300 to 850, credit scores determine how much credit consumers are eligible for, their interest and repayment terms, and whether banks will give them long-term loans like mortgages or car loans. Credit scores are tallied by three major credit bureaus -- Experian, TransUnion and Equifax -- and are based on a number of factors. Here's a breakdown of what determines your credit score:

Payment history

The largest chunk of your credit score is determined by how reliably you pay your bills. Accounting for 35 percent of your credit score, your payment history includes any unpaid or late bills, delinquencies and public debt records.

Debt-to-income ratio

How much you owe in comparison to your total credit limit makes up 30 percent of your score. To keep your score high, experts recommend that you maintain credit card balances of less than 30 percent of your credit limit.

Credit history

Consumers with the best credit scores have had their cards for a while. Comprising 15 percent of your score, credit history shows that you can keep an account in good standing throughout the years. To maintain strong credit history, consumers thinking about ditching one of their credit cards should start with the newest one.

Credit mix

Twenty percent of credit scores are determined by what types of credit consumers maintain and whether they have inquiries on their credit report. Those with a mix of revolving credit, like charge cards, and installment credit, such as loans and mortgages, will have higher credit scores than those who stick to one type.