Your credit score is a three-digit number that plays an important role in qualifying you for everything from loans and credit cards to apartment rentals and even some insurance policies. It usually falls between 300 and 850—a higher number is better—and its calculation has a lot to do with the five factors explained below.

#1) Credit Payment History

Payment history is the number-one factor that potential lenders check to assess risk. It usually makes up 35 percent of your credit score.

Have you paid all your bills on time? Fantastic. Your excellent payment history will raise your credit score. However, any late payments will lower your credit score. In fact, just one late payment can lower your credit score between 100 and 150 points. Then it can take one to two years to regain those lost points.

Are you an individual who has no credit payment history? Don’t worry. Having no history may be better than having a bad history. That’s because building credit is easier than fixing a poor credit history.

#2) Amounts You Owe

When it comes to credit cards, financial experts often recommend using only 30 percent of your credit limit. For example, if you have a credit card with a $10,000 credit limit, you should use only $3,000 of that amount.

Plus, you should make monthly payments in a consistent manner to lower your total debt. This is much better than carrying your debt month to month and only paying off the interest fees. That approach will likely do little to improve your credit score.

#3) Length of Credit History

The longer the history, the more attractive it is—especially if it is a positive history. For example, suppose you had obtained a credit card ten years ago and always used that card responsibly. You would have a nice, long history with your credit card company—one that would help boost your credit score.

#4) Newer Credit

Your credit score will go down immediately any time you open up a new credit card or get a new personal loan. So, don’t do either of those things right before you apply for a car loan or a mortgage loan. When you are ready to buy a car or a house, you want your credit score to be as high as possible.

#5) Types of Credit You Have

When mortgage lenders look at a person’s credit history, they also look at the types of credit used, including revolving credit and installment credit. Revolving credit refers to credit cards. Installment credit refers to car loans and personal loans. Typically, lenders like to see that a potential borrower has had at least one line of each type of credit; then they can examine how well that person handled both types of credit. PM

Belinda Landry is CRA and fair banking officer at Heartland Bank and Trust Company. Do you want to get on the road to owning a car or home? Click here to learn more about your credit and financial education courses that will help you along this road.

This content is for informational purposes only. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific advice from their own counsel.