What Goes Into a Credit Score?

When you apply for a mortgage, rental property, auto loan, credit card and even insurance, your credit score largely determines whether the company in question will do business with you. While multiple credit scoring formulas exist, the FICO score calculated by the Fair Isaac Corporation is the most widely used credit score in the U.S. The better you understand the factors that go into determining your credit rating, the more efficiently you can work toward building better credit.

Account Payments

Each payment you make to your lenders and creditors influences your credit scores. According to the Fair Isaac Corporation's MyFICO.com, each consumer's payment history accounts for 35 percent of his credit score. While timely payments help you increase your credit rating, missed payments will adversely impact your scores for up to seven years. Thus, making on-time payments to your creditors is a crucial part of building the best credit score possible.

Recent Activity

The more recent your activity on an account, the greater its impact on your credit scores. This not only includes recent payments, but recent inquiries by creditors and new accounts you open. Because your recent activity accounts for 10 percent of your credit score, derogatory entries on your credit report have less of a negative impact on your credit rating the longer they sit inactive---allowing you to establish a better credit rating through recent responsible debt management.

Legal Records

Certain legal records about you, such as judgments against you, bankruptcies, tax liens and previous foreclosures, appear on your credit report. Legal records are always detrimental to credit scores. While the Fair Credit Reporting Act limits most negative reports to no longer than seven years on your credit report, certain legal records are an exception to the rule. A judgment, for example, will remain for the amount of time your state allows creditors to enforce judgments and bankruptcies can remain on your credit report for up to 10 years.

Debt-to-Credit Ratio

The amount you owe your creditors helps determine how capable you are of repaying debts. High debts indicate a risk of financial instability and adversely impact your credit rating. The amount you owe your creditors accounts for 30 percent of your credit score and your debt-to-credit ratio is a significant part of this calculation.

Debt-to-credit ratios only apply to revolving debts, such as credit card debts, and represent the percentage of your credit line still available for use. Keeping your balances low is crucial to preserving a positive credit rating. CNN Money recommends carrying a balance of no more than 30 percent of your credit limit.