Credit Scores: Giving Credit Where It’s Due

Amir Farry | Published July 22, 2020 | Updated July 27, 2020 | 5 min read


A credit score is a number (from 300 to 850) used by lenders to evaluate how likely they believe you will be to pay back a loan. Individuals with higher credit scores are more likely to be approved for loans and more likely to be given favorable interest rates. Most types of credit providers use credit scores, from credit card companies to mortgage, student, and auto loan companies.

While there are two major types of credit scores (FICO and VantageScore), we will be focusing on FICO scores since they are the most widely used by lenders. FICO scores can generally are broken down into five buckets:

  1. Poor: Less than 580
  2. Fair: 580 - 669
  3. Good: 670 - 739
  4. Very Good: 740 - 799
  5. Exceptional: 800+

Source: myFICO

These scores are reported by a credit bureau, which is an agency that packages and analyzes information from consumer credit reports to determine your credit score. The three major credit bureaus are Equifax, TransUnion, and Experian. It is important to note that credit scores change with time. If you check your credit scores once a month, you’ll notice a slight variation from month-to-month. These changes happen because the data used in calculating your credit score also changes from month-to-month, as we’ll get into below.

The five categories to consider when calculating your FICO score are:

1) Payment history (35% weighting)

The credit bureau wants to know
  • Have you missed payments?
  • How often have you missed payments?
  • When was the last time you missed a payment?
  • Have you had any debts turned over to a collection agency?
  • Have you had any foreclosures?
  • Have you filed for bankruptcy?

Credit bureaus want to see that you haven’t missed any payments. If you have, they want to see that these have not been frequent or recent occurrences.

2) Total debt (30%)

The credit bureau wants to know
  • How much do you currently owe between all of your accounts?
  • Are your credit cards nearly maxed out? 
  • How many accounts with balances do you have? 
  • How much of your available credit are you using?

Credit bureaus want to see that you don’t have much debt and aren’t using a large portion of your available credit (e.g., you’re nowhere near your borrowing limit on credit cards)

3) Length of credit history (15%)

The credit bureau wants to know
  • How old is your oldest account? 
  • How old is your newest account? 
  • What is the average age of all of your accounts?

Credit bureaus want to see that you have established credit over a long period. Generally, the longer your accounts have bee outstanding, the better your credit score will be.

4) New credit applications (10%)

The credit bureau wants to know
  • How many times have you applied for new credit in the past 12 months?

When you apply for a new credit card or loan, the lender asks to view your credit report. These reports are sourced from one of the three major credit agencies referenced above through a process known as a “hard inquiry.” Each inquiry can lower your credit score by a few points at a time.

5) Credit mix (10%)

The credit bureau wants to know
  • What types of credit have you used?

There are two types of credit accounts: revolving accounts and installment accounts.

Revolving accounts are accounts that provide you with more flexibility regarding the amount paid monthly. These include credit cards, retail store cards, gas station cards, and home equity lines of credits or (HELOCs).

Installment accounts are accounts that usually require a fixed payment each month until the loan is fully paid off. These include mortgage loans, auto loans, and student loans. 


Lenders like to see that you have used a mix of revolving accounts and installment accounts to prove that you can successfully manage different types of credit.

Word of warning

Even though a broader credit mix can help with your credit score, this only comprises 10% of the total formula. On the other hand, a new loan would result in a hard inquiry from a lender and an increase in the total debt you owe. Both of these would reduce your credit score. Therefore it is generally advisable to only take out new forms of credit when you actually need it.

How to check your credit score?

There are many ways to check your own FICO score. Several credit card companies and banks allow you to check your credit score if you use their credit cards. These include Discover, American Express, Citibank, Bank of America, Ally Bank, and many credit unions as well. If your credit card company does not provide you with free credit scores, you can also go to to view your FICO score for free. 

Five tips for improving your credit score

  1. Always make your payments on time. For credit cards, you ideally want to have zero balance outstanding at the each of each month. If you are struggling financially, at least make the minimum payments required.
  2. Try to keep your debt levels as low as you can. This tip applies to both loans and credit card balances. 
  3. Ask your credit card company to increase your credit limit. As mentioned before, credit bureaus penalize you for using too much of your available credit. To combat this, you could ask your credit card company to see if they would be willing to increase the credit limits on your credit cards.
  4. Avoid applying for too many new loans or credit cards. While new credit card promotions can make it seem attractive to open up new accounts, this can be a trap! Opening up a new credit card will lower your accounts' average age and result in a hard inquiry by a lender. The impacts of these actions on your credit score can cost you more in the long-term than the credit card opening bonuses you receive.
  5. Keep older accounts open. Since your accounts' average age partially determines your credit score, you want to be careful about closing your older accounts. Removing these will reduce the average age of your accounts, thereby lowering your credit score.

Do you have a particular question about credit scores? Feel free to reach out with any questions.

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