What Determines Your Credit Score?

When buying a new car, one of the most important factors in what you can or cannot afford is your credit score. A good credit score means a lower interest rate on your loan, which means you can afford a fancier vehicle. But a bad credit score has the opposite effect, raising your interest rate and limiting your options. But what determines your credit score? There are five main factors which we have listed below, in order of importance.

Payment History

It’s quite simple—pay your bills on time and your credit score will improve; pay late and your score will suffer. The types of history taken into account include credit cards, retail store cards, installment loans, mortgage loans, and finance company accounts. Altogether, your payment history determines 35% of your credit score, so it’s imperative you keep on top of your accounts each month.

Amounts Owed

The second biggest factor in determining your credit score is the amounts you owe. While having a large balance doesn’t automatically put you in the risky category for lenders, customers who have used a high percentage of their available credit are seen as overextended and likely to miss payments. The amount owed determines another big chunk of your credit score: 30%.

Length of Credit History

There’s a reason why younger people tend to have lower credit scores, and that’s because they usually have shorter credit histories. This factor determines 15% of your credit score, and takes into account the length your credit accounts have been established, the age of your oldest and newest accounts, the average age of all your accounts combined, and how long it has been since you used certain accounts.

New Credit

It’s okay to open a new credit account, but if you open a bunch in quick succession it’ll send up a red flag—particularly if you don’t have a long credit history. If your history is a bit longer, opening up a new line of credit will have a smaller impact, but an impact just the same. This factor only affects 10% of your credit history—not a huge deal, but enough to keep an eye on.

Credit Mix

Having a good mix of credit types will have a positive impact on your credit score. Generally, those who have a mixture of credit cards, retail accounts, mortgage loans, installment loans, and finance company loans will fare better than those who don’t. However, this only accounts for 10% of your total credit score, and it’s not a good idea to open up lines of credit you don’t need just to diversify your credit mix.