If you have a 700 credit score or higher, you probably figure you'll have few problems getting credit -- at least that was the case right up until you didn't qualify for the low-interest auto loan you were expecting. Or maybe your score's a little below 700, but you got a pleasant surprise when you traded your clunker in and got the best rate. What gives? Why can credit scores -- something that's critically important -- be so frustrating to understand? 

Let's pull back the curtains and take a closer look at what your credit score is made of, and what you can do to make it better. 

What your credit score is based on 
The credit score that most people commonly think of is called the FICO score, which was created by the Fair Isaac Corporation and introduced in the late 1980s. The FICO score is between 300 and 850 and is determined based on the following categories (with weighting in parenthesis):

  • Payment history (35%).
  • How much you owe/credit utilization (30%).
  • Length of your credit history (15%).
  • Types of credit you use (10%).
  • New credit inquiries (10%).

It's also worth noting that federal law requires that the credit bureaus that report your history in these categories provide you with a copy of your credit report free of charge each year. It won't have your score, but you'll be able to learn what your score is based on. Go here to learn how to get yours. 

Payment history 
FICO has revised its credit scoring model over the years, and FICO Score 9 is the most recent version, though Score 8 (according to is the most popular. According to FICO, Score 8 is better than previous scoring systems at isolating things such as a rare late payment, versus someone with a more regular history of lateness.

Don't misunderstand: Late payments will still ding your credit, and missed ones will hit it even more. But according to FICO, Score 8 will ding you less if it's clearly an aberration and not a sign of significantly higher risk. On the other hand, it says that those with a pattern of late payments may take an even bigger hit. More good news: FICO Score 8 also apparently ignores collections if the original balance was less than $100. 

But any way you slice it, your demonstrated ability to consistently make payments on time is one-third of your credit score.

Amounts owed 
This category causes the most confusion, but at 30% of your score, it's as important as your payment history. In short, it's basically a combination of how much you owe as a percentage of your available credit -- called credit utilization -- and how high your total available credit limits are.

The mix of kinds of debt apparently doesn't affect your base score, but FICO does say that carrying high balances on even a few of your credit cards can affect your score, since this could be an indicator that you're stretching your limits. 

The key is finding the balance based on your financial situation to build an established history of meeting your credit obligations, while also not relying too heavily on debt, especially revolving debt such as credit cards. 

Credit history length 
The longer you remain in good standing with a creditor, the more history you build as a reliable user of debt. FICO does take into consideration how long it's been since you used certain accounts, so if your oldest accounts are ones you don't regularly use, you may not get as much benefit. Unless there's some benefit to closing accounts you don't use often (such as eliminating annual fees) it's not necessarily good to close them, since even accounts you don't use will help improve your overall credit utilization. 

Types of credit you use 
The most common types of credit are:

  • Credit cards
  • Term loans
  • Retail credit accounts
  • Mortgages

FICO says your credit score isn't really affected by the mix of credit that you have, but it's important to be aware that there are industry-specific FICO scores for mortgage, auto, and credit cards. Depending on your history in a single category, this could affect your ability to establish a specific kind of account.

New credit accounts and inquiries 
According to FICO, inquiries affect your credit for only 12 months, and the company says it has designed the system to allow for "rate shopping," so if you're looking for the best interest rate for a loan, feel free to shop around for the best deal. Multiple credit card applications in a short window of time can have a negative impact, because of the higher risk associated with this kind of debt. Either way, FICO says credit inquiries don't have very much impact on your credit score, and some don't have any. 

Also, opening new accounts can have a negative impact, but it's typically small, and once you establish a good history, it should help your score since it's more evidence of your quality as a credit customer. 

Putting it all together 
It can seem confusing and complicated, but your credit score shouldn't be some mystical number. If you're building up (or rebuilding) your credit, the most important thing to focus on is making sound financial decisions. 

  • Use credit only when it's necessary, responsible, and you can easily afford to pay it off. 
  • Don't open credit cards you don't intend to use, keep your balances as low as possible, and, ideally, pay them off in full to avoid interest. 
  • If you can't pay off balances in full, be sure to make payments on time. 

Your credit score is based on a history of your actions with regard to credit. If you practice responsible fiscal behavior, your credit score should, over time, reflect that, and you shouldn't have to jump through special hoops, or carry balances on high-interest cards to "earn" a good score. However, if you use most of your credit much of the time or make a few payments late, it's going to hit your score, as your actions reflect increased risk in lending you money. 

Lastly -- and maybe the most important message -- your credit score is only one part of the credit risk analysis. Your income, length of employment, time at your current residence, and other qualifications all play a role in determining your creditworthiness. They may be just as important as your score.