<prompt> Human: Simply put, a credit score is a firms numerical assessment that quantifies the question: What kind of risk am I taking on this person? With credit scores becoming one of the cornerstones of pre-employment screening and apartment leases, its important to discern from fact and rumor when it comes to managing your score.The traditional credit score is calculated using an algorithm from Fair, Isaac, and Company, or FICO for short. The algorithm takes information from one of the three credit bureaus that gather information on your payment history: Experian, Transunion, and Equifax. A computer generates a number based on one of your reports, and spits out your credit score. This number can range from 850 perfect credit all the way down to 300 perfectly terrible credit.However, there are several different flavors of credit scores. FICO has tuned their algorithm to give out a mortgage score, an auto score, a bankcard score, and so on and so forth. Even more: your score in any of these categories will be different depending on which bureau originated it. Your TransUnion score will be different from your Experian score, for example. But no matter where it comes from, every score is based on the health of five different factors:Your payment history is 35 of your FICO score.Naturally, the biggest indicator of whether someone will pay their bill on time is how well theyve done so in the past. Some of the best credit scores have an extremely long history of on-time payments. This means that missed payments, delinquencies, collections accounts, judgements, and other derogatory marks will affect your score negatively. While they hurt your score, though, they do not do so permanently. Bad marks fall off at the 7 year mark.Unfortunately, paying utilities, rent, and other bills dont contribute to your score. These accounts do not count as tradelines, or lines of credit, so FICO doesnt consider them. However, if they get passed on to a collections agency, they will affect your score negatively.So if there is one thing to know about this category, its to always pay your bills on time. Ideally, especially for your credit cards, you will want to pay all of your statement balances in full every month to avoid paying interest.Special note: An interesting fact about the FICO algorithm is that you need six months of history to even register a score. Applicants with thin files will actually have no score associated with them.Your amounts owed is 30 of your FICO score.This category is somewhat complex, and it generates a lot of confusion when discussed. Also called credit utilization, this includes the following sub-factors among other things, in varying amounts: The total amount of credit available vs. the total amount of balances on revolving accounts. The amount of credit available on individual revolving accounts vs. the individual balances. The original loan amounts on installment accounts vs. the current loan balance. Amounts owed. Number of accounts with balances.Your utilization is calculated using the most recent reports from your financial institutions. Since most banks and credit unions report the statement balance to the bureaus, you can safely assume that your most recent statement balances are what your score is based off of.One important thing to note is that utilization does not have a history. There is no average utilization. It is solely based on the most recent reports from your financial institutions. So it really is only a snapshot of your liabilities, and can improve or crash in the span of less than a month. Its generally advised that you can ignore utilization until a month or two before applying for a new line of credit.Generally speaking, if you are above 30 of your credit limit, a lender may consider you to be higher risk. A statement with a 30 utilization will hurt your score until a lower balance is reported. This is only a transient problem, however, since once again utilization has no memory.It logically follows that paying down debts and keeping balances low will increase your score. The lower your balances, the better. In addition to this, it is often helpful to apply for or randomly be approved for limit increases. Just be wary of hard inquiries.Your length of history counts toward 15 of your FICO score.This category takes into account, among other things, the following information: Age of your oldest tradeline. Age of your newest tradeline. Average age of accounts AAoA.Its fairly straightforward to think that the longer you have been managing credit, the more experience you have with keeping in time with payments and dealing with financial institutions. Therefore, you are seen as less of a risk.All tradelines, both opened and closed, will contribute to your AAoA until the 10 year mark.Your types of credit in use is 10 of your FICO score.Consumers can benefit from a diverse mix of accounts. A combination of installment and revolving credit will bolster a score slightly, since the lender knows that the consumer has dealt with different types of tradelines. In addition, the number of each type of account is factored in.It is not, however, necessary to take out a loan simply to boost this category it is actually detrimental to some degree. Credit cards are sufficient tools for building credit history, and this category will take care of itself in due time. Never take out a loan simply to boost your score.Your credit-seeking activity counts toward 10 of your FICO score.FICO figures that, statistically, consumers that seek out lots and lots of credit in a short period of time tend to be higher risk. This is reflected in your score to some degree, as you can expect. When you apply for credit to be extended to you, it typically results in something called a hard inquiry.Hard inquiries by themselves, are not that big of a deal. For most credit files, your score will take a hit of less than 5 points. A hard inquiry will continue to affect your score for one year, and will fall off your report entirely after two years. The only warning here is to avoid too many inquiries in a short period of time.Sometimes, for information and other general purposes, some companies will pull your credit report without the intent to extend credit to you, resulting in something called a soft inquiry. While you may see soft inquiries on your credit report for up to two years, soft inquiries do not affect your score, and lenders do not consider them. So while its common for lenders to offer pre-approvals for credit cards or loans, this does not count as credit-seeking activity, since you are not applying for credit.Special note: You are given a 45-day grace period to shop around for the best auto loans or mortgage rates, and have it count only as one inquiry. It is always in your best interest to get the lowest rate you can, and FICO recognizes that money saving habits are different from credit seeking habits. This grace period, however, is not extended to credit cards. Common Credit Myths and MisconceptionsNot using your credit card will hurt your score.This is a hard one to pull apart, because it contains a couple of half-truths. The first truth is that 0 utilization across all your revolving accounts looks bad for the month. But again, this is somewhat of a non-issue, because as above utilization only counts for the most recent reports from your bank or credit union. So if you were to charge a pack of gum and let the statement report, you would be right back where you used to be.The second truth is that sometimes banks will close accounts that have not seen activity for six months or so. If this is just one of your many cards, closing will bring down your credit available, increasing your utilization and thus decreasing your score. If its your oldest account, it will also bring down your age of accounts. Before letting a card go inactive, always check your terms to make sure.Really, other than that, an inactive, open card will not affect your score positively or negatively. The only thing you can consider it to be is a missed opportunity to increase your number of on-time payments. Otherwise, it will keep your utilization low and your average ages matured.You should carry a balance and pay interest on your credit card to build trust with the bank.I tackled this one already.You need to use a certain percentage of your credit limit every monthThere is only one credit utilization adage that matters: the lower, the better. Some of the best scores only have utilization between 1 and 9 rounded up.Utilization does not have any memory, so its pointless to force yourself to spend above or below a certain amount to get a higher score in a month that youre not applying for new credit. In addition to this, your credit score will not factor the amounts paid on revolving accounts; the only thing that matters from month-to-month is whether you paid on time.Simply focus on sticking to only regular expenses, and pay off your statement in full every month.I should take out an installment loan for no reason other than to pay it back and boost my score.You really shouldnt. While you will, over time, gradually build a payment history, keep in mind that account mix is only a small fraction of your score. Its not worth paying hundreds in interest to see what is often a five point increase in your score for this category. Not to mention, your amounts owed category which is 30 of your score will be damaged for the time you are paying it off.Instead, consider getting a credit card or secured card, if you have little or bad credit history and paying the statement balance in full each month. That will build a strong enough payment history without having to pay interest.I should pay the minimums on one of my loans, because if I pay it off completely, it will stop contributing to my score.This is a myth. While you will no longer have the opportunity to increase your number of on time payments, the good history associated with your loans as well as the loans contribution to your age of accounts will continue to add to your credit score until the date of closure reaches the 10-year mark. This is true even of credit cardsNaturally, you dont need to pay a dime in interest that you dont need to in order to have an excellent score. If you want to keep contributing to your number of on time payments, take out a credit card and pay off the statement balance every month.Checking my own credit will hurt my credit score.When you check your own credit, FICO recognizes that you are not seeking new credit. Checking your own credit will not decrease your score. To the same effect, most monitoring systems like CreditKarma or Quizzle are soft inquiries; and the same goes with cards that offer free FICO scores with their monthly statement. Again, the real risk that FICO is trying to quantify is your credit-seeking activity. If youre not signing on for new credit or credit increases, you are not going to affect your score.I can bring up my AAoA by closing my youngest account.Not entirely true. Your AAoA is calculated by all tradelines, including closed accounts. Your closed account doesnt magically get erased. Instead, closed accounts will continue contributing to your score until the 10-year mark from the date it was closed.You will, however, change your age of your newest account, listed above. But addition to this, you will also diminish your overall credit available, which is the biggest risk of closing an account if you cant recover the limit elsewhere.Further Reading: Whats in my FICO Score? via MyFico Credit Scoring in the United States via Wikipedia FICOs 5 Factors via CreditCards.com Improving your Credit Score via Bank of AmericaFor free estimates of your FICO score FAKO score and credit monitoring: CreditKarma TU Credit Sesame EX Credit.com EX Quizzle EQCredit cards no annual fee that offer a free FICO score with their monthly statement: Discover cards TU Barclaycards TU FNBO Cards EX Walmart Store Card TUPSA: Always pay your statement in full.Deposit accounts that offer a free FICO score with their monthly statement: Digital Credit Union EQFederal law mandates that consumers are entitled to a free credit report every 12 months. These credit reports will not contain your score, but they do contain the information that your score is based on. To obtain your credit reports from all three bureaus, go to Annualcreditreport.com You are expected to report any inaccurate information on your reports to the credit bureaus. Some recommend to stagger your reports to one bureau every 4 months to keep an eye on your identity throughout the year.You also have the ability to check reports at Innovis and ChexSystems While most lenders will likely never check your Innovis report, it is still good practice to ensure your information is accurate. ChexSystems is a reporting agency that handles deposit accounts, such as checking and savings, and will not be used for credit checks; they may, however, be pulled if you are looking to get a deposit account with a bank or credit union.  <response>: Well stated.One thing people dont understand is that is the credit score is only one piece of the underwriting puzzle. If you have perfect credit and make 50,000 a year and want to borrow 300K to start a restaurant, its not going to happen unless you have some serious collateral.If you have good credit you will be able to get a reasonable car and a reasonable mortgage without much hassle. 