A credit score is a crucial three-digit number, typically ranging from 300 to 850, that signals your creditworthiness to lenders, landlords, and sometimes even employers. Understanding how credit scores work helps you make smarter borrowing decisions and opens doors to better financial opportunities.
What Shapes Your Credit Score?
Credit scores are calculated using several key factors, each with a different level of impact:
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Payment History (35%): Timely payments on loans and credit cards matter most. Missed or late payments, defaults, or bankruptcies can significantly lower your score.
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Amounts Owed (30%): This refers to your “credit utilization ratio,” or how much debt you have compared to your total available credit. Ideally, use less than 30% of your limits across all cards.
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Length of Credit History (15%): The longer your accounts are open and in good standing, the better. This shows lenders a track record of responsible credit management.
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New Credit (10%): Applying for several new credit accounts in a short time can be seen as risky behavior and may temporarily reduce your score.
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Credit Mix (10%): A healthy credit profile includes a variety of credit types—credit cards, auto loans, home loans, etc. Managing different types responsibly further boosts your score.
