The 5 Factors That Make Up Your Credit Score

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The almighty FICO credit score – used in almost every big boy & girl purchasing decision. It’s repeatedly drilled into our heads that we need good credit to buy a home or car, apply for loans or credit cards, etc. This is true, so it’s important to know what the components of your credit score are and the best ways to improve it.

This photo, “Credit Score Breakdown”, is copyright (c) 2016 and made available under an Attribution 2.0 Generic (CC BY 2.0) license

1. Payment History (35%)

Payment history is the most important factor in determining your credit score. Pay on time, all the time, and you’re off to a great start.

Have you paid anything late? The later you pay, the more it hurts your credit score. Have any of your debt accounts been sent to collections? Do you have any foreclosures, bankruptcies, charge-offs, judgments or liens against you? These are among the worst blemishes on your credit report and will severely hurt your score.

Also, there are different types of debt (more on this later); defaulting or missing payments on larger loans, like a mortgage, will hurt your credit score more than missing a payment on a small credit card, for example.

2. Credit Utilization (30%)

Credit utilization is the amount of total available credit being used. For example, if you have one credit card with a credit limit of $10,000 and your current balance owed on the card is $3,000, your credit utilization ratio is 30%. The ratio is computed on each individual credit card as well as overall debt.

You should be aiming for a credit utilization ratio of under 20%. Anything above that tends to be a bit of a red flag for lenders because it communicates that you may not be able to manage your debt as well as they would like.

This does not mean you should go open 50 new credit cards to raise your overall credit limit. Why? See #3 and #4.

3. Length of Credit History (15%)

The longer your credit history, the better it is for lenders to really get a good look at your debt habits. If the history is good, that works in your favor.

Nicholas Aiola, CPA - The 5 Factors That Make Up Your Credit Score - Credit History

It matters

If you’re a credit newbie, start small with applying for a store credit card at your favorite place to shop; they’re easier to get approved for than general credit cards issued by banks. As you develop a history, you can graduate to the bank-issued plastic.

If you’re a credit veteran, make sure to keep all old accounts open and don’t go opening too many new ones; closing old accounts and opening up a bunch of new credit cards in a short period of time will hurt your average age of credit, thus lowering your score.

4. New Credit (10%)

It is not wise to open too many lines of credit in a short amount of time for three reasons:

    • Each time you open a new line of credit, a hard inquiry/pull will appear on your credit report (as opposed to a soft inquiry/pull, which does not appear anywhere). Hard inquiries remain on your credit report for 2 years and then disappear. It is best to keep the amount of inquiries at one time (in the same 2-year span) to under 3.
    • It will lower your average age of credit (see #3).
  • It could be perceived that you are a desperate borrower who may be in financial trouble. If you’re applying for a mortgage in the near future, don’t open up any new credit cards immediately beforehand because it could lead the mortgage lender to believe that you plan on using the credit and therefore won’t be able to make the mortgage payments.

5. Credit Mix (10%)

How many different types of credit do you have? Believe it or not, it could play in your favor to have a few different types of debt outstanding.

For example, if you have a mortgage, student loan debt, and a couple of credit cards (and a good payment history on all of them, of course), it shows lenders that you are capable of managing different forms of credit. This makes you a less risky borrower.


To make sure your credit score is in tip-top shape (in order of importance):

    1. Make all your payments on time. 
    1. Keep your credit card balances below 20% of the card’s credit limit. 
    1. Don’t close out any old accounts. 
    1. Don’t open too many new lines of credit in a short amount of time. 
  1. Have a good mix of different types of credit (and a good payment history on all of them).
Nicholas Aiola, CPA - The 5 Factors That Make Up Your Credit Score - Good Credit

This could be you

Also, remember to check your credit reports regularly. Each of the three main credit bureaus (Equifax, Experian, and TransUnion) offer you one free credit report check per year. If you notice anything that shouldn’t be there, reach out to them immediately to get it fixed.

If you have any other tips to reach or maintain a high credit score, let us know! 👇

The photo used for the featured image of this blog post, “Credit score”, is copyright (c) 2016 and made available under an Attribution 2.0 Generic (CC BY 2.0) license.

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Nick Aiola is a CPA and the owner of Aiola CPA, PLLC. Nick and his team provide the highest quality of tax and advisory services to real estate investors and individuals and business owners in the real estate industry.

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