Five Components of a Good Credit Score

Your credit score is a three-digit number that represents your creditworthiness to lenders. When you apply for new credit, lenders determine whether or not to loan you money and at what rate based on your credit score. The higher your score, the more likely you are to be approved for new credit and the better your interest rate will be. If you credit needs improvement, learn what five components make up a good credit score.

Payment History

Your payment history makes up the largest part of your credit score. According to myFICO.com, 35 percent of your credit score is based on whether or not you pay your bills on time. Late or missed payments on a single account can cause your credit score to drop significantly. Multiple delinquencies, collection accounts or judgments can be even more devastating. Paying your bills on time each month helps you to establish a solid payment history, which can boost your score over time.

Total Debt

The second component of a good credit score involves your debt-to-credit ratio. Thirty percent of your credit score consists of how much debt you owe versus your total amount of credit. If you have a total credit line of $25,000 and total debt over $24,000, you have a high debt-to-credit ratio, which works negatively against your score. Paying down outstanding debt can increase your ratio and improve your credit score.

Account History

The age of your accounts also factors into determining your credit score. The length of time your accounts have been open accounts for 15 percent of your credit score. While you may be tempted to close old accounts as you pay down debt, this can actually hurt your credit score. If you're trying to improve your credit score, keep older accounts open and use them periodically to maintain activity.

Inquiries

Any time you apply for new credit, it is recorded on your credit history. Ten percent of your score is based on the number of new inquiries for credit. If you're trying to rebuild your credit, you may be tempted to open multiple new accounts. This can actually have the reverse impact on your score because it can make you look desperate to lenders.

Account Type

The type of credit you use accounts for 10 percent of your credit score. For example, you may have revolving credit accounts, charge accounts, installment loans, mortgage loans or vehicle loans. Having a diverse blend of accounts demonstrates to lenders that you are responsible enough to handle different types of credit.