Credit Score 101: What Determines Your Score

Most people are well aware of how their credit score affects their financial prospects, but many consumers have little to no understanding of how their credit score is actually calculated. Knowing what goes into determining your credit score can help you avoid the factors that bring it down.  (If you haven't already, get your credit score for free.)

The three major credit bureaus—Experian, Equifax and TransUnion—use scoring systems based on the FICO method (from the Fair Isaac Corporation) to translate information from your credit report into a three digit credit score between 300 and 850. Different types of information are weighted differently according to level of importance.

Here are the five major credit score factors and how they affect your credit score:

1. Payment history. This factor accounts for 35% of your credit score, the largest percentage. This section takes into consideration how promptly you make payments on existing credit including credit cards, mortgages, auto loans, etc. Late payments (more than 30 days late), payments sent to collections and delinquent accounts affect this portion of the score. Public records like bankruptcies, liens and court judgments are also noted in this category. Negative marks are not weighted equally. The more severe the infraction, the more your credit score is penalized. The date of these events is also considered. The more recent a negative event occurs, the larger the affect on your credit score.

2. Outstanding debt. This factor accounts for 30% of your credit score. This section of your credit takes into consideration how much you owe on unpaid accounts including home loans, car loans and credit cards. With credit cards, the outstanding debt is compared to the total credit card limit. The closer the balance is to the limit, the worse it is for your credit score. The amount you owe is considered as a percentage of your available credit. The lower that percentage is, the better it is for your credit score.