How Credit Scores Work: The 5 Factors That Really Matter

Credit scores play a big role in your financial life, affecting everything from getting approved for the best travel credit cards to securing low interest rates on loans. For millennials who love travel hacking and premium rewards, a good credit score is especially important. The average FICO credit score in the U.S. was 715 in 2024, which is considered “good.” But aiming higher can give you access to even better perks and deals. So, how does your credit score work, and how can you improve it? It all comes down to five core factors.

Financial institutions primarily use the FICO® Score (used by ~90% of top lenders) to evaluate creditworthiness. This score ranges from poor to excellent and is calculated from information in your credit reports. Only the data in your credit report is considered – factors like your income or age do not directly affect your score. Instead, FICO’s formula focuses on five categories of data. Below, we’ll break down the five factors that really matter for your credit score and explain why each is important.

FICO credit score factor breakdown. Payment history and amounts owed (credit utilization) make up the bulk of your score, as shown above, while factors like credit mix and new credit have smaller roles. Understanding these five components can help you focus on the actions that will improve your score the most. In the sections below, we explain each factor and how it affects your credit.

Here’s a quick overview of the five key FICO score factors and their approximate weightings:

Now let’s look at each factor in detail and see how it impacts your credit score.

Payment History (35% of Your Score)

Your payment history is the most important factor in your credit score, accounting for roughly 35% of the total. This factor reflects whether you pay your bills on time. Lenders want to see a track record of on-time payments across all your credit accounts. Even a single missed payment can have a serious negative effect. In fact, one payment that’s 30 days late could drag your score down by 100 points or more, especially if you had a high score to begin with. And the longer a debt goes unpaid, the worse the impact. Major delinquencies like accounts sent to collections, foreclosures, or bankruptcies will severely damage your credit and stay on your credit report for up to seven years.

Tip: Always pay at least the minimum due on time every month. Setting up automatic payments or calendar reminders can help you avoid ever missing a due date. A perfect payment history will steadily build your creditworthiness, while late payments are very hard to undo. If you do slip up once, focus on getting current as soon as possible. The effect of a single lapse will fade over time, but multiple late payments can snowball into a major credit score hurdle.

Credit Utilization (30% of Your Score)

The second biggest factor is your credit utilization (called “Amounts Owed” in FICO’s terms), which makes up around 30% of your score. Credit utilization measures how much of your available credit you’re using, primarily on revolving accounts like credit cards. It’s calculated by dividing your credit card balances by your credit limits. For example, if you have a total credit limit of $10,000 and your current balances add up to $3,000, you’re using 30% of your available credit.

A lower utilization rate is better for your score. Using a large portion of your credit limits (even if you pay on time) can signal to lenders that you’re overextended. Experts recommend keeping your utilization below about 30%, and the lower, the better. People with excellent credit scores often use less than 10% of their available credit. High utilization, on the other hand, will start to drag your score down once you exceed that ~30% level.

The good news is that credit utilization is one of the most responsive factors. You can improve it relatively quickly. If your credit card balances are high, paying them down can yield a credit score boost as soon as the lower balances are reported to the bureaus (usually by your next billing cycle). You can also improve your overall utilization by requesting a higher credit limit or spreading your spending across multiple cards. Just be careful not to increase your spending when your limit rises, since the goal is to widen the gap between what you owe and your available credit.

Tip: Aim to pay off your credit card balances in full each month if possible. If you do carry a balance, try to keep your utilization ratio under 30% on each card and overall. (Under 10% utilization is even better for your score.) You can make an extra mid-cycle payment to reduce the balance that gets reported to the bureaus. Keeping your balances low not only helps your score, it also means you’ll pay less interest, freeing up more money for your next vacation or rewards trip!

Length of Credit History (15% of Your Score)

Your credit score also considers how long you’ve been using credit. About 15% of your FICO score is based on the length of your credit history. This factor looks at how long your accounts have been open, including the age of your oldest account, the age of your newest account, and the average age of all accounts. In general, a longer history of responsible credit use is positive for your score, because it gives lenders more evidence of your experience managing credit over time.

There’s not much you can do to improve this factor overnight; it literally takes time. If you only started using credit recently, you simply haven’t built up a long track record yet. For example, someone who got their first credit card a year ago will have a shorter (and less score-friendly) history than someone who has been using credit for 10 or 20 years. The only way to gain a “long” credit history is to keep your accounts open and be patient.

That said, there are a couple of things to keep in mind. First, avoid closing your oldest credit card accounts if they don’t cost you an annual fee, as a long-standing account helps boost your average age of credit. (Closed accounts in good standing remain on your credit report for up to 10 years so they still count toward your history during that time. But once they eventually drop off, your average account age could drop.) Second, whenever you open a brand-new account, it will lower your average account age. This is another reason not to open too many accounts in a short span.

Of course, you shouldn’t fear opening new accounts that you truly need or that provide real value (like a great travel rewards card). Just be aware of the small, temporary dip in your score that can happen when a new account is added.

Tip: Keep your oldest account open if possible, and maintain a few accounts for the long term. A solid, lengthy credit history will build naturally. If you’re just starting out, consider opening a starter credit card or a small credit-builder loan to begin establishing credit. Over time, those accounts will age into positives for your score. Patience is key. As you reach 5, 10, or 20 years of credit activity, your score will reflect that deeper history.

New Credit (10% of Your Score)

Every time you apply for new credit, it can affect your score slightly. “New credit” (recent credit inquiries and newly opened accounts) makes up about 10% of your credit score. When you apply for a credit card or loan, the lender pulls your credit report, resulting in a hard inquiry on your report. Hard inquiries typically have a small, temporary negative effect on your score. Usually, a single inquiry might shave fewer than 5 points off your FICO score, and your score often bounces back within a few months as long as you continue to manage your accounts well.

However, multiple inquiries or new accounts in a short period can compound that impact. Credit scoring models consider it risky if someone is opening several accounts at once, since it could signal financial stress or overextension. If you go on a spree of new credit applications, you may see a noticeable dip in your score. Each new account also lowers your average account age, linking back to the length-of-history factor above.

One important detail: not all credit inquiries are treated equally. If you’re rate-shopping for a mortgage, auto loan, or student loan, FICO’s formula will usually group all similar inquiries made within a short window (typically 14-45 days) and count them as one inquiry. This way, you aren’t penalized for checking multiple lenders for the best rate. Credit card applications, however, don’t get this treatment. For example, three new credit card applications in one month would register as three separate hard inquiries, each dinging your score a bit. So if you’re eyeing a new travel rewards card for its sign-up bonus, be mindful to space out your card applications.

Tip: Space out your credit applications to avoid raising red flags. If you’re planning to apply for a mortgage or car loan soon, try not to open other new accounts right beforehand. And if you’re pursuing travel hacking strategies (opening multiple rewards cards to rack up points), spread out those card applications over time so your score has a chance to recover in between. Remember, the impact of a hard inquiry is small and fades quickly. Don’t lose sleep over the occasional credit card application. Just avoid too many in a short time.

Credit Mix (10% of Your Score)

The final factor in your credit score is your credit mix, accounting for roughly 10% of your FICO score. Credit mix refers to the variety of credit accounts you have, such as credit cards (revolving credit) and loans like mortgages, auto loans or student loans (installment credit). Having experience with different types of credit can slightly help your score, because it shows you can manage both revolving accounts and installment payments responsibly.

That said, credit mix is a minor factor in scoring. You do not need to have every type of credit account, and you shouldn’t take on debt you don’t need just to “improve” your mix. Many people have excellent credit scores with only credit cards and one loan (or even just cards). As long as you handle the credit you do have wisely, you’ll do fine on this component. If your credit profile is light on diversity (say you only have credit cards), it might slightly boost your score down the road to add an installment loan to the mix, but only if it makes sense for you (for example, financing a car or other necessary purchase). Don’t open a random loan account solely for credit mix purposes.

Tip: If you have only credit cards on your report, don’t worry. You can absolutely achieve a high credit score. Over time, most people naturally end up with a mix of credit accounts (for instance, eventually you might have an auto loan or mortgage in addition to cards). Focus first on the bigger factors like payment history and utilization. When you do need a loan for something important, it will automatically diversify your credit mix and might give your score a small boost. Until then, a few well-managed credit cards can build an excellent credit score on their own.

Bringing It All Together

Your credit score is essentially a report card of how you manage debt, distilled into a three-digit number. The five factors above (payment history, credit utilization, length of history, new credit, and credit mix) are the categories you’re graded on. By understanding these components, you can see exactly where to focus your efforts:

• Pay on time, every time: This has the single biggest impact on your score. Set up tools like autopay so you never miss a due date.

• Keep balances low: High credit utilization can cost you points (and money in interest). Try to pay off your cards monthly and keep your usage well below your limits.

• Build long-term relationships: The longer you responsibly maintain credit accounts, the better it is for your score. Don’t be too quick to close your oldest accounts.

• Apply for credit sparingly: Each new credit application can cause a small dip. Avoid opening a bunch of accounts in a short time unless necessary.

• Mix it up (when sensible): Having both credit cards and loans can help your score slightly. But only take on new credit if it fits your needs. Never borrow just to improve your credit mix.

For financially savvy people, like those figuring out how to maximize rewards on the best travel credit cards, maintaining a strong credit score is essential. A higher score opens doors to premium credit cards (think Chase Sapphire Reserve® or The Platinum Card® from American Express) that offer perks such as No Foreign Transaction Fees, airport lounge access, and huge welcome bonuses. It also means better interest rates on mortgages, car loans, and other financing, saving you money in the long run.

In summary, if you manage these five key factors well, you’ll put yourself in a great position to reap the benefits of excellent credit. Monitor your credit regularly, keep up those good habits, and over time you’ll see your score climb. A top-tier credit score can help you secure amazing travel experiences and financial opportunities, so it’s well worth the effort to understand how credit scores work and take control of your own credit journey.