What Makes Up Your Credit Score?

Introduction

Talking with mortgage applicants about their credit is always one of the most interesting parts of the application process. Nine out of ten times, I get the same question:

"Why is my credit score what it is?"

While most people know that a higher credit score is better, many don't fully understand what actually goes into a credit score or how their financial decisions impact it.

Understanding the basics can help you make smarter financial decisions, avoid common mistakes, and potentially save thousands of dollars when applying for financing.

Credit Scores Are Designed to Measure Risk

At their core, credit scores are designed to predict the likelihood that you'll repay your financial obligations.

Your score reflects how you've established and managed your credit accounts over time, giving lenders valuable insight into how you may handle future debt.

While your credit score tells an important part of the story, it isn't the only thing lenders review. Even borrowers with qualifying scores may have account history that requires additional review during the approval process.

A simple rule to remember:

The higher your credit score, the lower the perceived lending risk.

Payment History: The Most Important Factor

If there is one thing to remember about building excellent credit, it's this:

Pay your bills on time.

Payment history is the single most important factor in your credit score. Even one late payment on a relatively small account can have a significant negative impact.

One recommendation I make to almost everyone, including my own wife, is to set up automatic payments whenever they're available.

My preferred approach is simple: log directly into your creditor's website (not your bank's bill pay system) and set your account to automatically make the minimum payment on the due date.

Why the minimum payment?

Because it guarantees you will never miss a payment. If you want to pay more toward the balance, you can always make an additional payment at any time. It's an easy, free feature that eliminates one of the biggest reasons people accidentally damage their credit.

Collections & Charge-Off Accounts

Collections and charge-off accounts can be extremely damaging to your credit profile.

Typically, an account becomes a collection only after a lengthy period of missed payments, meaning you've already accumulated multiple late payments before the collection is even reported.

Addressing these accounts is important, but it's also an area where having someone who truly understands credit scoring can make a significant difference.

I've seen borrowers make what they believed was the "right" decision, only to unintentionally hurt their mortgage qualification because they didn't understand how a particular account would affect their scores.

If you have collection or charge-off accounts, I strongly recommend speaking with a mortgage professional who understands credit scoring before taking action.

Quick Tip: When possible, negotiating a pay-for-delete agreement with a collection agency is generally the preferred outcome. Having the collection removed from your credit report is often more beneficial than simply updating it to show as paid.

Bankruptcies

Bankruptcies are among the most serious derogatory events that can appear on a credit report. In addition to lowering credit scores, they can also affect your ability to qualify for future financing, including a mortgage.

Every financial situation is different, but bankruptcy is a significant legal and financial decision that should only be considered after consulting with a qualified bankruptcy attorney.

The most important takeaway from this entire section is simple:

Nothing builds strong credit scores more consistently than making every payment on time.

Credit Utilization: How Much of Your Available Credit Are You Using?

Credit utilization is generally considered the second most important factor in your credit score, so it's worth understanding how it works.

The term "credit utilization" sounds complicated, but the concept is actually simple.

It measures how much of your available revolving credit you're currently using.

For example:

• Credit Card Balance: $5,000

• Credit Limit: $10,000

Your utilization ratio would be 50%.

So why does it matter?

The higher your credit card balances are compared to your available credit, the greater the perceived lending risk. Since credit scores are designed to predict risk, borrowers who consistently carry high balances are generally viewed less favorably than those who keep their balances under control.

The good news is that, unlike payment history, utilization can often improve fairly quickly. As you pay down revolving balances, your utilization decreases, which may help improve your credit scores.

People often ask if they should stay below a certain percentage. While you'll hear many different opinions, I generally recommend something simpler:

Keep your balances at a level that is comfortable for your budget and that you could realistically pay off if necessary.

Healthy credit habits over time are more important than chasing a specific utilization percentage.

Length of Credit History

After payment history and utilization, the remaining credit score factors become less influential but are still important in building a strong overall credit profile.

Simply put, the longer you've successfully managed credit, the better.

Older accounts with long histories of on-time payments provide lenders with more confidence because they demonstrate responsible credit management over an extended period.

This is one of the reasons I usually recommend not closing a credit card simply because you've paid it off.

Keeping older accounts open can benefit both the age of your credit history and your total available credit.

The exception would be an account with a significant annual fee or one that no longer makes financial sense to keep.

If you decide to keep an older credit card open, make sure you use it occasionally. Some creditors will eventually close inactive accounts after long periods without activity.

New Credit & Inquiries

New credit is an interesting factor because it's necessary to build credit—but opening too many accounts too quickly can work against you.

A common mistake I see is opening store credit cards for small discounts.

For example, opening an Old Navy credit card to save a few dollars on a pair of jeans probably isn't worth it.

On the other hand, opening a Home Depot card for a major renovation project that offers significant savings may make financial sense.

Like most things involving credit, context matters.

If you're just beginning to establish credit, opening new accounts is part of the process.

If you're planning to apply for a mortgage in the near future, however, opening new credit accounts should generally be avoided unless absolutely necessary.

One misconception I'd also like to clear up involves mortgage inquiries.

Many people worry that shopping around with multiple mortgage lenders will significantly hurt their credit scores.

Fortunately, the credit bureaus recognize that consumers shop for mortgage financing. Multiple mortgage inquiries made within a designated shopping window are generally treated as a single inquiry for scoring purposes, allowing borrowers to compare lenders without being heavily penalized.

Credit Mix

The final factor is your overall mix of credit.

A well-rounded credit profile typically includes different types of accounts, such as:

• Credit cards

• Auto loans

• Student loans

• Mortgage loans

Successfully managing different types of credit demonstrates your ability to handle a variety of financial obligations.

That said, I don't recommend opening accounts simply to improve your credit mix.

If you're making your payments on time and keeping your balances under control, your credit mix will naturally develop over time.

Common Credit Score Mistakes

We've touched on many of these throughout the article, but they're worth repeating because I see them all the time.

One thing I always tell borrowers is this:

Your credit report is like your fingerprint.

No two credit reports are exactly alike. Even married couples with many joint accounts can have very different credit profiles. That's why advice that helps one person may not be the right solution for someone else.

Some of the most common mistakes I see include:

• Closing credit cards after paying them off. Keeping older accounts open can help maintain your available credit and the age of your credit history.

  
  

• Constantly carrying high credit card balances. High utilization can negatively impact your credit scores, even if you're making your payments on time.

  
  

• Thinking one late payment doesn't matter. Missing a payment on a department store credit card can impact your credit just as much as missing a payment on a larger loan.

  
  

• Applying for unnecessary credit. Opening multiple accounts in a short period of time can make you appear riskier to lenders.

If you have questions about your credit, or you're planning to apply for a mortgage I strongly recommend speaking with someone who understands both credit scoring and mortgage lending before making major credit decisions.

Improving Your Credit Score

Improving your credit score doesn't happen overnight, but consistently practicing good credit habits can make a significant difference over time.

Focus on the fundamentals:

• Pay every bill on time.

• Keep your credit card balances manageable.

• Avoid opening unnecessary new accounts.

• Review your credit reports regularly for errors.

• Ask questions before making major credit decisions.

Small improvements made consistently over time often produce the best long-term results.

The Bottom Line

Your credit score isn't random.

It's based on how you've managed your credit over time and is designed to help lenders evaluate risk.

By understanding the factors that influence your credit score, you can make smarter financial decisions, improve your borrowing opportunities, and put yourself in a stronger financial position.

Whether you're planning to buy a home next month or a few years from now, building strong credit today can open more doors tomorrow.

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This article is provided for educational purposes only and should not be construed as financial, tax, legal, or mortgage advice. Loan qualification and program availability are subject to lender guidelines and approval.