There are three major credit bureaus in the United States and each one of them tries to keep an accurate picture of you in terms of credit worthiness. The three bureaus are Transunion, Experian, and Equifax and you might be wondering what goes into this magical and mystical “credit score” and what you can do to improve that score so that you can get favorable loan terms the next time you need an auto loan or mortgage.

Before we go into the vague mathematics, let’s first discuss the underpinnings of credit scores so that the math makes sense. Imagine you have to lend someone money and you know nothing about this person, what sort of information would you like to know about them? You probably want to know how much they currently have borrowed (outstanding debt) right? The more they have borrowed, the less likely you’ll want to lend to them. You probably want to know how often they’ve paid on time, how often they’ve been late, or perhaps if they’ve ever defaulted (payment history). As you think about this more, if you could buy a history report on a person, you probably want to know how far this history goes back (credit history length) so you can see a trend or pattern. Finally, if you’re really good at this sort of thing, you probably want to know how many times this person has asked for credit recently (number of inquiries) because they could be trying to get a lot of credit quickly, you don’t want to keep giving this person money if they’re in a tight spot.

So, now that you’ve gone through that, here’s what goes into your credit score:

• 35% is based on your payment history - This covers how many times you’ve been late, whether it’s gone to collections, etc. Time is a factor here, having paid late ten years ago is less damning than missing that payment last month.
• 30% is based on your outstanding debt as a percentage of total credit - If you’ve tapped 90% of your credit and are looking for more, you’re far riskier than someone who has tapped 10% of their available credit and wants a new card. The higher the credit utilization, the lower your score.
• 15% is based on your credit history length - This is why people advise you to get a credit card early (even if it means sticking it in a drawer), the longer your history the better because they have more information to work with. A history of a year is clearly not as valuable as a history of ten years.
• 10% is based on your number of inquiries within the last year - In a tough financial spot? You’re probably going to be requesting for credit. If you have too many pings in the last year, your score is going to be lower than if you didn’t have any. This makes sense, if I told you that the person you wanted to loan money to just opened five credit cards in the last month, you’d likely be wary. Lenders think the same way.
• 10% is based on the types of credit you have - The number and type that you have will be a factor and this is only significant if there isn’t much information from the other categories. From a personal perspective, if you know someone has $15,000 in debt, it makes a big difference if it’s credit card debt or if it’s a car loan, right?

So, those are the five major factors that come into play when it comes to calculating your credit score, hopefully I’ve cleared some of it up for you and the number seems a little less magically generated.

If you’ve never had a credit card, trying to get one for the first will probably be very difficult because you have no history and thus you’ve built up no trust. So, a common tip I’ve read is to be put as an authorized user on someone else’s account so that you can begin building your history.

Unfortunately, unless the other person is a spouse, the company is not required by law to report the card to the credit bureaus - they can do so if they want, but they can’t be compelled to do so. Some companies do report the authorized user to the credit bureaus and so that can be a way to begin building history, but it’s not universal. Call ahead before you are put on as an authorized user if you’re using it to try to build your history.