A Comprehensive Guide to Credit Score and its Breakdown

A Comprehensive Guide to Credit Score and its Breakdown

Your credit score is at the core of measuring your financial health as it tells the lenders how good you are at using credit within limits and paying it off. A higher credit score makes it easier for you to get new lines of credit and loans. 

Additionally, a higher score may even allow you to secure lower interest rates on your loans. If you want to ensure that your credit score stays at an optimum level, you must understand its components. Knowing what can improve or worsen your credit score can help you navigate this financial terrain efficiently. 

What is a credit score?

Credit score works as a reference point for lenders to gauge your financial habits, strengths, and weaknesses. Lenders will check your credit score when you apply for a mortgage, personal loan, business loan, credit card, and any other lines of credit. 

While a good credit score might get you better loan terms, a bad one can result in you paying premiums for homeowners and auto coverages. Your landlord uses a credit score to determine if you will be able to pay the rent on time. 

From loans to tenancy and leasing a car to cell phone plans, your credit score plays an important role in establishing your eligibility to apply. 

5 Components of a credit score? 

Major credit scoring agencies such as FICO, Experian, TransUnion, and Equifax use 5 components to calculate your credit scores. Understanding the breakdown of your credit score will help you focus and improve on any or all areas that are hurting your borrowing power. Let us have a detailed look into each of them. 

#1: Your Payment History

Your payment history is one of the biggest elements of your credit score, making it the most important component. They look at your past repayment behavior to determine if you have been a responsible borrower. 

If you have been missing out on repayments, been inconsistent, or defaulted on a loan, this will hurt your credit history. Lenders will not only look at your payment history for credit cards and loans, but also your utility bills, rent, and insurance coverage payments. 

According to Ron Kaufman, a financial expert at FICO, consistent and timely repayments are one of the most efficient ways to maintain a good credit score. This can also help you improve your credit scores. 

#2: Your Credit Utilization

The second critical component of your credit score is how you use the borrowed amount. This allows lenders to observe if you have been a responsible user of credit in the past. 

Your credit utilization also gives lenders an insight into the number of debts you are carrying at present. In case you have a higher credit burden, the lenders will assume that most of your monthly income is already going towards repayments for these loans. 

This will most likely make you a higher-risk borrower. Why? This is because lenders will be skeptical and wonder if you will be able to afford another loan and keep up with its timely repayments. 

If you have been exceeding or even reaching your available credit limit constantly, the lenders will see you as a potential risk. Therefore, if you wish to maintain a good credit utilization score, keep your credit utilization ratio under 30 percent. 

#3: Duration of Your Credit History

This is the third important factor that refers to how many years you’d used credit. This determines 15 percent of your total credit score. The longer the credit history you have, the better. New credit users may face difficulty achieving a high score, hence struggling to secure loans and lines of credit. 

A good way to get this section in your favor is to open small lines of credits, even when you are not going to utilize them. This is an efficient strategy for young adults to demonstrate responsible behavior towards using credit. 

#4: Types of Your Loans and Credits 

Although this one does not play a vital role in lenders’ decisions to offer you a loan, they would still like to know your different credit commitments in the past. These include mortgages, personal loans, car leases, credit cards, and student loans. 

If you have been using multiple lines of credits, then you should not worry about this one. Instead, you can focus on improving your repayment history and credit utilization behavior. 

#5: Your Recent Lines of Credit

The final component of your credit score is the new lines of credits you have opened recently. This is why you may have heard that hard checks by lenders can hurt your credit score. If you have borrowed too much in a short time period, this can flag you as a potential risk, especially if you have a short credit history. 

You must also remember that these checks will appear on your credit report even when you did not get the loan. These inquiries usually stay on your credit report for at least 2 years. However, soft credit checks such as credit monitoring services do not appear on your credit file. 

What Is A Good and Bad Credit Score?

If you are new to credit scores or wish to know what good and bad credit scores are, here is a simplistic explanation for you. 

Good Credit Score

A good credit score can open doorways and make it easier for you to apply for new loans and lines of credit. A good credit score ranges between 690 and 719. A score over 720 falls in the excellent category, whereas any figure at 689 or lower is fair. 

Benefits of a Good Credit Score

Here are some perks you may enjoy for maintaining a good credit score. 

  • Get an unsecured credit card with optimal interest rates
  • Apply for a car loan or lease
  • Get favorable interest rates on a mortgage
  • Get new credits in emergencies

Bad Credit Score

According to recent reports, anything under 600 is a bad credit score. This can prevent you from securing credit or borrowing any kind of loan, no matter how big or small. The lenders will not get into the “ifs” and “buts” and simply turn down your application to borrow any amount of money. 

Some lenders may be willing to extend a line of credit to you, but these may come at the cost of paying higher interest rates and premiums for your coverage. 

Impacts of Bad Credit Score

While a bad credit score is not the end of the world, it does affect how much access you have to financial facilities. Having a bad credit score can result in the following

  • You will not be able to qualify for credit cards offering zero-percent interest. 
  • You will get subprime rates when applying for a house or car loan. 
  • You will most likely pay higher premiums on a car and home insurances 
  • You may find yourself stuck paying utility deposits

However, you must remember that a bad credit score does not imply that you are irresponsible. There is a possibility that you may have put an unexpected expense on a credit card and had trouble repaying it. Maybe you missed out on your home mortgage repayment after losing a job. 

A credit score is just a means for financial lenders to know if you can afford to carry the burden of another loan. Think about it: how will you pay another new loan if you have been struggling to pay the ones you already have?

Factors That May Hurt Your Credits Score

Here is a quick summary of factors that may harm your credit score. 

Credit Repayment History

If you have been missing out on payments or at worst, defaulted on a loan, this will stay a huge red flag on your credit file for a long time. While missing one payment is not going to have an impact but constantly missing payments is definite send your credit score spiraling downward. 

The loan or line of credit repayments recorded on your credit report include the following. 

  • Car loan
  • Student loans
  • Home mortgage
  • Cell phone bills
  • Store credit accounts
  • Medical bills
  • Lines of credit from the banks

Percentage of Credits Used

Yes, the lender gives you a certain credit limit. However, it is best not to use it to the fullest, and most importantly never exceed it. The best practice is to always use 30 percent of your credit limit. So if you have a credit card with a $1,000 limit, you should use up to $300 and pay it back on time. 

Anything over 30 percent does affect your credit score. So, let’s suppose you have a good credit score; a few instances of overusing your credit limit can your score fall into the fair category. Similarly, a fair credit score may turn into bad just because you overspend on your credit card. 

Short Credit History

This is mostly a problem for new borrowers such as teenagers, students, or ex-pats returning after many years. The shorter your credit history, the lower your credit score will be. There isn’t much you can do to improve this quickly except wait until you have some credit history to back up your applications for loans and credits. 

Too Many Hard Checks on Your Credit Files

Every time you apply to borrow from a lender, they will run a credit check on you with one of the credit scoring agencies. These are hard checks and will appear on your file for the next two years. Whether you get the loan or not, the next lender will see the credit check. 

Now, whether you got the loan or not is none of the new lender’s concerns. They will not give you the benefit of the doubt or investigate with the previous lender whether your loan was approved. The lender will count the credit checks under your name and determine whether to offer you a line of credit or not. 

How to improve your credit score? 

If you have fallen into the spectrum of bad credit scores, there are always some ways for you to get out of this pit. However, this is not going to happen overnight and will require your dedication and consistency towards your financial commitments. So here are eight ways you can improve your credit score

Reviewing Your Credit Report 

One of the best ways to self-assess your current financial strength is to monitor your credit report from time to time. You can request a credit report from one of the three major credit scoring agencies every quarter. This will help you monitor if there has been any change in your credit score and why. 

This way, you will be able to make changes to your financial behavior and keep your credit score at a decent level. 

Stay on Top of Your Bills

You may not think of them as something critical to your credit scores, but they actually are. Therefore, always stay on top of your bills, including medical, utility, cell phone, and insurances 

Remember the 30 Percent Rule

Remember what we discussed earlier? You should try your best to only use 30 percent of your credit limit at all times. Follow that, and you will improve your credit scores eventually. 

Thin is Best

Keep your records as thin as you can. You do not need lots of loans and repayments to pile up a good credit score. Even a simple credit card and its timely repayments can do the trick in the long run. 

Never Close the Old Accounts

Always keep your old accounts open. Once you close the account, credit scoring agencies will wipe off any credit history from your report eventually. For instance, you close a bank account that you have had for 10 years. Once you close it, the credit agency will stop reflecting its details on your credit report. 

This means 10 years’ worth of credit history wiped off, and the number of years can make or break your credit scores. So, you need to hold on to those old accounts. 

Consolidate Your Debts

Having too many lenders to pay back can sometimes confuse you, and you may end up missing out on a payment every now and then. Plus, different interest rates can also lead to mishandling of finances. Therefore, you can always consolidate your debts to a single lender and make a single payment with one interest rate. 


A credit score is not something to stress over, but ensure that you are careful with how you handle your financial obligations. A little consistent care of a certain period of time can help you achieve and maintain a good credit score. While having a good score does not mean you must definitely apply for the next loan pitched to you, it can help in certain unforeseen financial turmoil.