Borrowing money, whether in the form of a mortgage, car loan, or credit card charge, is practically a way of life for most of us. And your credit score plays a key role in helping you sustain your borrowing habits.

Your credit score isn't just an arbitrary number. Also known as your FICO score, your credit score is the result of a specific formula that will ultimately dictate your likelihood of getting approved for a loan or line of credit, and at the most favorable rate. Understanding how your credit score is determined can help you take steps to boost that number and avoid mistakes that can bring it down.

A man in a suit holds up a "credit score" card, with checkboxes next to the available options.


What goes into a credit score?

There are five key components that come together to establish your credit score:

  • Payment history (35%): Your payment history is a measure of how responsible you are with making payments. Paying your bills on time will help your credit score, while being late or skipping payments will hurt it. A lot.
  • Credit utilization ratio (30%): Your credit utilization ratio is the percentage of available credit you're using. You should always aim to keep this number at 30% or lower.
  • Length of credit history (15%): Your credit history speaks to the amount of time you've held your accounts. While younger borrowers have a natural disadvantage in this particular category, those with long-term accounts in good standing can benefit.
  • New credit accounts (10%): Opening too many new accounts at once sends a message that you need credit to keep up with your expenses. It's not a good message to send, so you're better off opening new accounts slowly over time.
  • Credit mix (10%): Your credit mix represents the variety of accounts you have open. There's a difference between having five credit cards versus two credit cards, a mortgage, an auto loan, and some leftover student debt.
Chart showing factors that go into a credit score


Note the percentages assigned to each of those factors. Certain components, such as payment history and credit utilization, carry far more weight than your new accounts and credit mix. Focusing on the right aspects of your credit score can help you boost it more quickly.

What's in a number?

Though we all tend to use the term "credit score" as a singular phrase, you actually have three different credit scores. The reason? There are three major bureaus -- Equifax, Experian, and TransUnion -- that put out scores for consumers, and while the formulas and information these bureaus use should, in theory, be similar, discrepancies can sometimes arise. Also, it could be that one bureau's information is more up-to-date than another's, which could work for you or against you depending on how things shake out. Either way, don't be surprised if you go searching for your credit score and wind up with three different numbers.

Your credit score can fall anywhere in the 300 to 850 range, with 350 being downright abysmal and 850 being perfect. Currently, the average American's credit score is an even 700, which is a good score, but not a great one. On the other hand, a score of 800 or above is typically considered excellent, and if you fall into that range, you're likely to snag the most optimal borrowing opportunities available. You should also know that a score below 580 is considered poor, so if you've yet to cross that threshold, you might face some serious rejection the next time you apply for a loan.

Boosting your credit score

Now that you know what goes into your credit score, you can take steps to tackle your shortcomings. Let's start with payment history. Simply put, if you want to beef up your payment history, you'll need to make a habit of paying your bills on time, every time -- no exceptions. If that's not a feat you can pull off directly -- say you're really strapped for cash and have many bills coming due -- your next best bet is to get added as an authorized user on someone else's account. This way, when that person pays the bills on time, you'll get to piggyback on his or her good habits.

If your goal is to boost your credit score as quickly as possible, tackling your credit utilization can help. The easiest way to bring down this ratio is to pay off a chunk of your existing debt, but if you don't have the cash, you might try calling your lenders and requesting an increase in your credit limit. If you have a decent history of paying on time (even if just your minimums), there's a good chance your lender will comply.

If neither of the aforementioned tactics work, you can try applying for a new credit card with a higher limit. While that step will result in a hard inquiry on your record, thus taking your new accounts rating down a notch, if it causes a steep drop in your utilization, you're likely to come out ahead. Becoming an authorized user on another card also helps with utilization, as that card's credit limit will get added to yours, thereby bringing your ratio down.

While you may be hoping to boost your score quickly, especially if you're looking to apply for a mortgage or larger loan, remember that building credit usually isn't an overnight process. Rather, it takes time, and it takes effort. The good news, however, is that the more you learn about credit scores and how they work, the better equipped you'll be to improve your number and get your hands on the best borrowing deals out there.