Your credit score plays a big role in your financial life. It affects your ability to borrow money, the interest rates you pay, and even your chances of getting approved for housing or utilities. But while most people know their score is important, few understand how it is actually calculated.
The good news is that the formula is not a mystery. Credit scores are based on five main factors that reflect how you manage money and debt. Once you know what these factors are, you can take simple steps to improve your score and strengthen your financial future.
The 5 Key Factors That Make Up Your Credit Score
1. Payment History (35 percent of your score)
Your payment history is the most important factor. Lenders want to know whether you pay your bills on time. Late payments, missed payments, or accounts in collections can lower your score quickly. On the other hand, consistent on-time payments show responsibility and help build a strong score.
2. Credit Utilization (30 percent of your score)
Credit utilization refers to how much of your available credit you are currently using. For example, if you have a credit card with a $1,000 limit and a $500 balance, your utilization is 50 percent. Experts recommend keeping your utilization below 30 percent, but lower is always better. This shows lenders that you are not overextended.
3. Length of Credit History (15 percent of your score)
The longer you have been using credit responsibly, the better it is for your score. This factor looks at the age of your oldest account, the age of your newest account, and the average age of all your accounts. Closing old accounts can sometimes hurt your score because it shortens your credit history.
4. Credit Mix (10 percent of your score)
Lenders like to see that you can handle different types of credit. This includes revolving credit, such as credit cards, and installment loans, such as car loans, student loans, or personal loans. You do not need every type of credit, but having a healthy mix can help your score.
5. New Credit (10 percent of your score)
Every time you apply for new credit, the lender performs a hard inquiry on your credit report. Too many hard inquiries in a short time can signal risk and may lower your score temporarily. Opening multiple new accounts at once can also shorten your credit history, which can impact your score further.
Why Understanding These Factors Matters
Knowing how your credit score is calculated gives you the power to make informed financial decisions. For example:
- If you focus on paying your bills on time, you protect the most important part of your score.
- By keeping balances low, you show that you can manage credit without relying too heavily on it.
- If you are building credit, patience matters. Time strengthens your history and improves your score naturally.
How Salarly Helps
At Salarly, we believe that financial wellness starts with knowledge and access to fair options. Understanding how your credit score is calculated is only the first step. The next step is finding borrowing solutions that do not create unnecessary stress.
Our payroll-linked loans are only one of the options we offer, and they are designed to make repayment predictable and simple. Because payments align with your paycheck, you can avoid late fees and reduce the risk of missed payments, which supports a healthier credit profile.
FAQs: How Your Credit Score Is Calculated
What is the most important factor in my credit score?
Payment history is the single most important factor, making up 35 percent of your score. Paying your bills on time consistently is the best way to protect and improve your credit.
Does checking my credit score lower it?
No. Checking your own credit score is considered a soft inquiry, which does not affect your score. Hard inquiries, such as applying for a loan or credit card, may temporarily lower your score.
How quickly can I improve my credit score?
Improvement depends on your situation. Paying down debt and making on-time payments can show results in a few months, but building a strong score usually takes consistent effort over time.
Should I close old credit accounts?
Closing old accounts can shorten your credit history and may hurt your score. If the account has no annual fee, keeping it open is usually better.
Can using payroll-linked loans help my credit?
Yes, if payments are made on time. Salarly’s payroll-linked loans make repayment predictable because they are tied to your paycheck. This can help you avoid missed payments and protect your credit history.
