Credit Score Formula

• Five factors go into determining your credit score. The first factor is your payment history. This accounts for 35 percent of your score. The second factor is amount owed. This is 30 percent of your score. The third factor is the age of your accounts. This makes up 15 percent of your score. The fourth factor is the different types of credit you use--10 percent of your score. The final factor is the number of inquires on your report, which is the last 10 percent of your score.
  
  

Understanding Payment History and Amount Owed

• Payment history and amount owed are the two most important factors in determining your score; together they make up 65 percent of your score. Payment history takes several things into account. First, it looks at your late payments. Payments are categorized as either 30, 60 or 90 days' late. Obviously, the later the payment the more it hurts your score. Payment history also looks at whether you have ever settled a debt for less than what you owed or declared bankruptcy. Bankruptcies can stay on your credit report for up to 10 years and have a seriously adverse impact on your credit score.
  
  The amount owed factor looks at how much of your available credit you use--in other words, it evaluates your debt-to-credit ratio. When you are given a loan or credit card, there is a maximum amount of money that you can borrow. If you borrow the full amount or "max out" your credit cards, then you will score lower than if you borrow much less than the full amount available to you. In other words, the higher your debt-to-credit ratio, the lower your credit score.
  
  

Understanding Inquiries, Age and Types of Credit

• Each time you open a new credit account, you lower the average age of your credit. This has an adverse impact on your score. Length of credit history makes up 15 percent of your score, and the longer you have had accounts open, the better.
  
  In addition, each time you open a new account, the lender requests or "pulls" your credit report. This is listed as an inquiry. The number of inquiries makes up 10 percent of your score. Too many inquiries can lower your score because creditors feel you may be charging more than you will be able to pay back.
  
  Finally, the types of credit you use is important. It is best to have a mix of different types of debt, including secured debt (mortgages and car loans) and unsecured debt (personal loans and credit cards).