How Your Credit Score Is Calculated

How much you owe (and who you owe it to) can affect your credit score, which is derived from these five factors:

    • Your payment history 35%
    • The amount of money you owe 30% (discussed on this page)
    • The length of your credit history 15%
    • New debt and credit inquiries 10%
    • Your credit mix 10%


We're exploring each topic in detail. Earlier, we discussed the importance of your personal payment history. On this page, we'll cover the money you owe.

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How your debt level affects your credit score

This is a broad concept and takes into account several aspects, including:

• the total amount that you owe,
• to whom you owe it,
• the proportion of money owed to the amount paid, and
• how many accounts you owe on.

Let's look at each of these more in-depth.

How much you owe
Creditors like to see that you've borrowed money before and successfully paid it back.

Owing a large amount of money, however, can mean that you're financially overextended and, therefore, may have trouble making payments on new debt.

Owing something and making regular payments, on the other hand, is a very good thing for your FICO credit score, as it demonstrates your ability to manage credit responsibly.

To whom you owe it
If you do owe a lot of money, the reason why and how you borrowed it in the first place can be very important to potential lenders.

For example, having a large mortgage is a more desirable debt than owing the same amount of money in revolving credit card debt. Having a lot of revolving debt seems reckless to a lender while taking out a home mortgage seems more responsible.

Sidebar
This may see like a capricious way for lenders to measure credit-worthiness, but the fact is that this is how it works, and we have little choice but to live with it. Even if you've been making on-time payments to your credit cards, check your credit score regularly to see where you stand.

The proportion of your debt that is still owed
A lender likes to see a history of you paying back loans or debts in the past. A large debt that is mostly paid off signals to a lender that you are capable of managing debt - even large ones.

How many accounts you still owe on
As a rule, having many accounts with large balances is not as desirable a situation as having fewer accounts with smaller balances.

In general, though, closing zero-balance accounts in which you are in good standing generally won't help your score. So, there's little reason to close that credit card account you haven't used in a year - it generally won't help your FICO credit score.

In addition to the "money you owe", the duration of your credit history is also a determinant in your FICO credit score. Although quite self-explanatory, let's take a closer look at this third factor.


Next: The length of your credit history