How it works your credit score

The five factors

The FICO model, which most lenders use, is built like this:

• Payment history, 35%: whether you pay on time; it carries the most weight
• Amounts owed, 30%: mainly your card utilization
• Length of credit history, 15%: how long you have had credit and the average age of your accounts
• Credit mix, 10%: whether you have different types: cards, loans, auto
• New credit, 10%: hard inquiries and recently opened accounts

The first two factors add up to 65%. Paying on time and not maxing out your cards is a big part of the game; the rest adjusts at the margins.

The ranges

• 800 a 850: exceptional
• 740 a 799: very good
• 670 a 739: good
• 580 a 669: fair
• 300 a 579: low

Utilization: the underrated factor

It is one of the fastest things you can change. The general guideline is to stay under 30%, and the best scores tend to sit below 10%. It is measured two ways, per card and across your total limits, and both matter: a maxed-out card hurts you even if the others are at zero.

The statement date detail: the bank reports to the bureau the balance on your statement date, not the one on your due date. If you pay a few days before the statement date, a lower balance is reported, and the change usually shows up in the next reporting cycle.

How long each item stays

• Late payment: up to 7 years from the delinquency
• Collection account: up to 7 years from the original first delinquency
• Charge off: up to 7 years
• Chapter 7 bankruptcy: up to 10 years
• Chapter 13 bankruptcy: up to 7 years
• Hard inquiry: about 2 years
• Closed account in good standing: up to 10 years, and that works in your favor

The clock on a collection runs from the first delinquency with the original creditor, not from when the collector bought it. If a report shows a more recent date, that is worth reviewing.

Myths that cost money

• “Leaving a balance on the card helps my score”: false, it only generates interest; pay the full balance
• “Checking my score lowers it”: false, checking your own report is a soft inquiry
• “Closing old cards improves my score”: false, it lowers your total limit and your average account age
• “Paying off a collection erases it”: false, it changes to “paid” but usually stays on the report
• “Earning more money raises my score”: false, income is not part of the calculation
• “I only have one score”: false, each bureau has its own and there are several models

What usually moves the score

• Lowering utilization: it is one of the fastest and can show up within one reporting cycle.
• Reviewing and correcting report errors: reports can contain wrongly reported data, and correcting it can influence the score.
• Catching up on past-due accounts, to stop the damage that keeps piling up.
• Not opening new credit for a while, so the effect of recent inquiries fades.
• Letting time pass while paying on time: it is not fast, but it is what builds a solid foundation.

Where to start: review your full report. It is more common than people think to find accounts that are not yours, incorrect balances, duplicates, or altered dates, and you have a legal right to dispute them.