your credit scoreCredit scores are very important three-digit numbers that can have an impact on everything from your ability to get a home loan, secure a new credit card, be approved for a rental space or buy a new car. Credit scores are a reflection of your financial responsibility. They factor in elements like how much credit you use, how reliable you are at making payments for what you owe and how long you’ve been practicing good credit financial habits. Having good or excellent credit scores can get you lower interest rates and better chances of approval for more appealing credit cards and loans.

The FICO® credit scoring model

A FICO® Score is a three-digit number determined by your credit report information. More than 90% of lenders use FICO® scores to make lending decisions, according to FICO, which makes it the most widely used credit scores in the United States. There are other credit scores out there — like ones provided by credit bureaus Equifax and TransUnion for educational purposes— but FICO® scores are the most popular and recognizable, ranging between 300 to 850.

FICO® scores take five factors into consideration to determine an overall score: payment history (35%), amounts owed (30%), length of credit history (15%), types of credit accounts (10%) and new credit (10%).

Payment history

Payment history is your credit history of making payments on time. This factor looks at any late payments you’ve made. Depending on how long your credit history is, a couple of late payments will have no significant factor on your score. A consistent history of late payments, however, will cause your score to dip.

The FICO® score looks at payment history for credit cards, retail accounts, mortgage and installment loans and finance company accounts. Factors like bankruptcies, financial lawsuits and wage attachments will also affect your payment history.

Length of credit history

Even if you’ve had a perfect payment history, the shorter your history is, the less favorably it’s viewed by lenders. Longer credit history has a more positive effect on a FICO® score.

To determine the credit history length, the FICO® score looks at how long your credit accounts have been open for and how long it has been since the accounts have been used. Also, the age of your oldest and newest accounts and the average age of all your accounts are factored in.

Types of credit accounts

Types of credit accounts, also known as “credit mix,” is another factor in a FICO® score. Having various types of credit is a way to demonstrate your creditworthiness and your ability to balance multiple lines of credit.

Having credit cards and loans active gives lenders a better idea of your ability to manage accounts responsibly compared to not having those accounts at all. Credit mix isn’t as significant of a factor compared to other FICO® score components, but it can still affect your score.

Amounts owed

Amounts owed indicates how much you owe in credit card charges, plus what you owe on installment loans. Credit utilization also factors into the amounts owed component. When you use a high percentage of your total available balance on a credit card, this may be a reflection that you are not being financially responsible and that you are likely to go into debt, miss payments and/or make late payments.

The amounts owed is determined by the total balances on your last statements. So, even if you have paid off your card balances in full, that won’t be reflected until your next statement cycle. Also, amounts owed takes into account how many credit card accounts and installment loan balances you have. A high number of accounts with balances is an indication that you’re borrowing a high amount of money, which lenders may consider risky.

New credit

New credit is a factor in FICO® scores because it shows how many new accounts you’ve opened in the past year. Opening a lot of new accounts in a short amount of time can be considered risky, make you look desperate to lenders and lower your FICO® score. If you have a short credit history, opening several new accounts in a short period of time may be considered an even greater risk.

How many new accounts you have in comparison to how many accounts you have total will also be taken into account. Plus, new accounts will lower your average credit age, which can negatively impact your credit history score factor. Even if you’re not approved for credit you apply for, the inquiries made into your account during the application process will influence the new credit factor in your FICO® score.

Plenty of factors affect credit scores, with the most important being your payment history and amounts owed. It’s a good idea to start building credit early on with a diverse mix of accounts to create a long credit history. More importantly, you must use credit and loans responsibly and make on-time payments, keep your credit utilization low to give your score a boost and avoid opening multiple new accounts each year if possible. You may want to keep older accounts open since that can give the credit history factor a boost. With solid credit scores that are good or excellent, you’ll be able to qualify for the most rewarding credit cards and will be more likely to secure loans, like mortgages or car loans.