Lenders use your credit score to decide whether on not to lend you money. Your credit score is a three-digit numerical summary of your credit history [1]. The better your credit history, the higher the score. The higher the credit score, the more creditworthy you are. Your credit score determines the interest rate [2] you pay on mortgages, loans and credit cards. Insurance companies use your credit score to decide whether to issue you a policy. Some employers even look at credit scores when deciding whom to hire.
Each credit bureau uses its own secret formula to calculate a credit score. Because of this, you actually have several different credit scores. While the actual formula is secret, what is known is what goes into the credit score.
Around 35% of your score is based on your debt [3] repayment history. This includes things like whether or not you pay your bills on time.
30% or so is based on the total amount you owe. This tells the lender whether or not you’re overextended.
15% of your credit score is based on the length of your credit history. Creditors like it when you’ve had the same credit card for 10 years. When you pay off credit cards, set them aside but don’t cancel them. This will help you increase the length of your credit history and raise your credit score.
10% has to do with the different types of credit you have. If you only have credit cards, consider applying for another type of credit, like a personal loan. The more varied the credit the better.
10% is based on new credit applications. Don’t apply for too many new credit cards at once, especially if you’re about to apply for a mortgage. It doesn’t look good on your credit report [4] and will lower your credit score.
Now that you know what goes into your credit score, you can work towards raising it.