What goes into a credit score? Why is it important?

These days, consumers probably hear an awful lot about their credit scores, and how important these are. But what they often do not hear is what actually goes into making up those scores, and the benefits and drawbacks that these numbers can have on all aspects of their financial lives, depending upon how they're managed overall.

There are five factors that comprise a credit score, and some have larger impacts on the total rating than others. For instance, a full 35 percent of the score is based on nothing but payment history, meaning that if a person is up to date on all payments for every one of his or her outstanding credit accounts, and has been for a period of at least several months, then this aspect of the rating will be perfect. The second-largest factor is known as "credit utilization ratio," and accounts for 30 percent of a score. Essentially, the best way to max out this portion of the score is to owe less than 30 percent of all the combined credit limits on existing credit card accounts. Any more than that, and a score will begin to deteriorate.

The remaining three aspects make up the final 35 percent. Of that number, 15 percent is made up of the average amount of time consumers have had all their various types of credit, with longer borrowing histories yielding higher scores. The amount of new credit carried by the borrower (less is better, because it generally means more financial stability) and the different kinds of accounts in his or her name (more is preferred, as it shows a history of proper management of different terms) each make up another 10 percent. 

What does a strong rating mean?
In general, having a good credit score can be a great way for consumers to save money overall, because it will entitle them to better terms on all kinds of things. That includes new types of credit - on which they can receive more affordable interest rates, fees, and even rewards perks - and even types of insurance coverage. For this reason, consumers should regularly try to take the time to carefully evaluate where they stand with their credit, and which aspects of their borrowing histories need the most work to get them up to the best possible levels in the shortest amount of time. Doing so could have a major positive impact on their household budgets.