Next you have the amounts owed which is worth 30% of your score. This is taken in comparison to the amount of credit that you have available. So for example, if you have 2 credit cards that have a limit of $10,000, your total credit line is $20,000. If you have a balance of $5,000 on each card, you will have 50% utilization of your credit. Again, because of the high proportion that this has on your credit score, you can pay down your balances and see major shifts to your score.
Length of credit history consumes 15% of your score. To determine length of credit history, all of the open accounts on your report are examined and then averaged together. So if you have 3 accounts that have an age of 6 years, 4 years, and 2 years respectively, your length of credit history would show as 4 years. If you add another account, your length of credit history score will drop initially to 3 years. For this reason, it is important to the homebuying process that you do not obtain new credit in the first few months before applying for a home loan and then until after closing on your home loan.
A variety of different type of credit is also important and accounts for 10% of your credit score. Different types of accounts may be in the form of credit cards, retail accounts, installment loans, and mortgages. It is good to have a variety. If you are new to credit, it might be advantageous to take out an installment loan to make a large purchase instead of charging it to a credit card.
Finally, your credit score looks at how many times you have applied for credit in the last 12 months. If you have many inquiries on your credit report, it is possible to see a decrease in your score. Since this only accounts for 10% of the score, the impact of inquiries may only be minimal. I often am asked if me running credit in conjunction with a home loan application will lower their score. The answer is yes it will, but as long as all of the other factors are maintained, the drop will be very minimal.