The credit score… something everyone gets asked about but few people actually understand how it is calculated and how to increase it. Let me first remove any liability by stating that, “I am not a financial advisor and all of the information below is based off my own research, experience, and knowledge of my personal journey to increase my credit score”. In this post we are going to cover the 6 parts of your credit score and what each of them entails. As someone who personally thought it was a good idea to open a credit card every time I wanted a new shiny object in college…I can tell you that was a horrible idea. Over time I have been able to master my credit score and currently see 850 in sight!
The 6 parts of your credit score
Your credit score, whether it be TransUnion, Equifax, or Experian, is made up of 6 parts, all with different “weights”. These components are:
- Credit card utilization : total balances / total credit limit
- Negative reports: accounts in collection, bankruptcies, etc.
- Credit type and history: how old is your oldest account and is your credit diversified
- Total accounts: total number of accounts(open or closed)
- Recent inquiries: how many times has your credit been pulled recently(car loans, credit cards, etc.)
- Payment history: on time payments / total payments
These 6 components are then divided into two sections, high impact and medium/low impact factors. The high impact factors are:
- Credit card utilization
- Negative reports
- Payment history
The medium/low impact factors are:
- Credit type and history(medium)
- Total accounts
- Credit inquiries
Knowing that, let’s dive into each of these categories a bit more!
Credit Card Utilization
Arguably the most important factor of your credit score is credit card utilization, which is simply the total balances across all accounts / total credit limit. Credit card utilization in my opinion is the area that is easiest to tackle and help improve your score…by not waiting until the end of the month to pay down your card. Although you won’t accrue interest until the end of the month, your utilization is continually increasing every time you swipe your card, thus lowering your amount of available credit. The lower the available credit you have the higher your credit card utilization is which negatively effects your credit score. Ideally you want to keep your credit card utilization under 30% in order to not be deemed “high utilization”. That all sounds great but what does it really mean?
Let’s say you are looking to purchase a new car and want to ensure you are getting the best interest rate possible. Using the above as the starting point, we will run two scenarios to see the difference:
- You have $20,000 in total credit and currently have utilization at around 20%($4,000). This utilization would keep you out of the “high utilization” category and therefore increase your chances of getting a better interest rate.
- You have $20,000 in total credit and currently have utilization at around 20%($4,000). You decide a sweet new gaming computer that costs $4,000 is a necessity and put it on your credit card. This now brings your balance to $8,000 and your utilization to 40%. When your credit score is pulled for your car loan, you now are deemed as having “high utilization”, lowering your credit score and increasing your interest rate. As someone who can speak from experience… DON’T DO THIS!!
Negative Reports
Negative Reports are arguably the simplest thing to avoid with literally your only necessity being to pay your bills! Allowing your accounts to go into collections or defaulting on loans makes lenders leery of working with you in the future, thus lowering your possibility of future loans and increasing your interest rates when they do loan money to you.
Payment History
Payment history is the final of the three high impact factors, which looks at your on time payments / total payments. Anything generally less than 97% of on time payment history is considered poor and dramatically effects your credit. For ease of math, let’s say you have two credit cards that were opened a year ago, this would give you a total of 24 payments. If you miss just a single payment, your on time payment history drops to 95.8%! If you are able to, always ensure that you are making payments early to lower both utilization and the chances that you miss a payment.
Final 3 factors
The final three factors make up a small portion of how your credit score is determined, however they still carry some weight. Age of credit is important because it is not something you can change… unless you have mastered time travel. Cancelling your oldest card will have more of a negative effect on your credit than cancelling a new card, however I don’t recommend you do either! Put the card in a drawer and use it every few years for gas or a pack of gum, just to keep it open.
Total accounts is another area that can be controlled by not cancelling cards and opening accounts as necessary. To be considered in the “good” or “excellent” category for the bureaus, your are going to want to have between 11-19 and 20+ open accounts respectively. Keep in mind these aren’t just credit cards but accounts in general, everything from mortgages, car loans, and credit cards.
Credit inquires is the final factor in your credit score, however ironically enough you need inquires to get approved for cards that will then increase your score. A great example of this is something I personally did a few months ago to add some Hilton Honors points for an upcoming trip. I decided to intro bonus hunt using my tax bill as the catalyst to achieve the spend requirements, which required a credit inquiry to get approved for the American Express Hilton Aspire. What’s nice about American Express is they provide you with a credit simulator that allows you see how changes to your credit profile will impact your score, therefore I knew that adding the American Express Hilton Aspire to my card portfolio would increase my score by approximately 12 points. On the opposite spectrum, I know that cancelling my oldest card will decrease my credit score by 9 points, which is not something I am wanting to do on my hunt for 850!
Hopefully this post has provided some insight as to what makes up your credit score! Leave comments or questions below and stay tuned for a future post about how to rebuild your credit!
The Points Authority: Mastering The Points Game 
11-19 open accounts seems like a lot to me. Outside of mortgage, car and say two – three credit cards…what else would count towards this total?
Is there anywhere you can truly pull your credit regularly to see your score without it pinging against you? Feel like a lot of places claim to offer that service and it never turns out to be harmless.
Less important question but curious! How did you pay your tax bill on a credit card? Didn’t it cost you a high fee (3%?) which depending on the amount owed could have been a couple hundred bucks. Was the 12 point increase in credit score worth it the extra cost?
Sorry for the novel but loved the article! Thanks for posting.
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Thanks for the feedback! So 11-19 open accounts is definitely a large number, however because it is a “low” factor it’s one I would not personally focus too much on, aside from not cancelling accounts! For example, if you only have 8 accounts vs 19 it’s not going to make a major difference in your score 🙂
As far as your credit score, American Express gives you both your vantage 3.0 and one of the bureaus. My chase card gives me a different bureau and lastly my Bank Of America card gives me the last bureau. The short answer is you are entitled yearly to a free credit report from https://www.annualcreditreport.com. This site is backed by the Federal Trade Commission and is in my opinion, the only site you should use aside from your credit card company of your choice.
As far as taxes, pay1040.com charges 1.99%. As long as you are earning more than 2% back in either an intro bonus or on your normal cards then I see it as positive return on investment. When I used my Hilton Amex, I received 150,000 points (after spending $4,000), which I value at $900. Using $4,000 as the base, I would have paid $80 to gain $900 so a net of $820!
Hope this helps!
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