The five ingredients
The common scoring models run from 300 to 850 and draw on nothing except your credit reports. The most widely used model publishes approximate weights.
- Payment history counts for about 35 percent.
- Amounts owed, chiefly the share of your credit limits in use, counts for about 30 percent.
- Length of credit history counts for about 15 percent.
- Recent applications count for about 10 percent.
- The mix of cards and installment loans counts for about 10 percent.
Your income, savings, job and debit card habits appear nowhere in the calculation.
Payment history
A payment is reported as late only when it is 30 days past due. A payment three days late costs a late fee and no points. A true 30-day delinquency can take 60 points or more off a strong score, and it remains on the report for seven years, although its weight fades noticeably after two. Collections and charge-offs do heavier damage, and automatic payment of at least the minimum on every account is cheap insurance.
Utilization
Utilization is your balance divided by your limit, measured on each card and across all of them. The balance that counts is the one the issuer reports to the bureaus, usually the statement closing balance, so even a person who pays in full can show high utilization. Under 30 percent is acceptable and under 10 percent is best. Most models give utilization no memory, which means a maxed-out month hurts only until a lower balance is reported. Before a mortgage or car loan application, pay your cards down a few days before their statements close.
Inquiries, age and folklore
A hard inquiry usually costs fewer than ten points, affects the score for a year and leaves the report after two. Several mortgage, auto or student loan inquiries made within a window of 14 to 45 days, depending on the model, count as one. Checking your own score is a soft inquiry and costs nothing.
Closing a card does not erase its history, since accounts closed in good standing remain for up to ten years, but it removes that card's limit and pushes utilization up. Keep your oldest no-fee card open and charge something small to it a few times a year so the issuer does not close it for inactivity. Carrying a balance and paying interest has never helped a score.
Note Roughly 670 counts as good and 740 as very good, and the best loan pricing usually arrives around 760. Points beyond that buy nothing except satisfaction.
