5 Factors That Affect Your Credit Score
Your credit score represents your creditworthiness as a borrower. It impacts your ability to qualify for cards, loans and even certain types of housing, so it’s important to understand what affects your credit score.
- Your credit score is based on the information lenders and other financial institutions report to credit bureaus.
- Though there are multiple credit scoring models, FICO Scores are used by 90% of lenders.
- FICO Scores are calculated based on five factors: payment history, credit utilization, length of credit history, credit mix and new credit.
What affects your credit scores?
Credit scoring companies calculate your credit score based on multiple factors. When you miss a payment, apply for new credit or close an account, lenders report it to the big three credit bureaus — Equifax, Experian and TransUnion — and depending on the type of activity, it could help or hurt your score.
Multiple credit scoring methods exist, but 90% of lenders make decisions based on your FICO Score. The exact formula has never been revealed, but the basic factors that impact your credit are public knowledge. Each factor is weighted differently, meaning some will affect your score more than others. Here are the factors you need to keep in mind:
| Definition | Impact on your credit score | |
|---|---|---|
| Payment history | How often you pay your bills on time | 35% |
| Credit utilization | How much of your available credit you’re using | 30% |
| Length of credit history | The age of the oldest credit account on your report | 15% |
| Credit mix | The different types of credit you have | 10% |
| New credit | Recent hard credit inquiries triggered by credit applications | 10% |
Let’s take a closer look at how each of these factors can affect your credit.
1. Payment history
Payment history affects your credit more than any other factor, so it’s important to pay your bills on time. It only takes one late payment to hurt your score, and multiple late payments can have a compounding effect, leading to serious damage.
Lenders report late payments to credit bureaus once the payment is at least 30 days past due. If you continue to miss your payments, your lender could send the account to collections. This typically occurs once a debt is considered significantly delinquent — usually after 90 to 180 days of missed payments.
Collection accounts stay on your credit report for seven years, and they tell lenders that you have a history of delinquency, which makes you a riskier borrower. As such, these accounts will drag down your credit score. In general, payment history accounts for 35% of your FICO Score.
2. Credit utilization
The factor with the second largest impact on your score is your credit utilization, which is the amount of available credit you’re using. Using too much of the credit that is available to you can make it seem like you’re struggling to manage your debts, which can hurt your score.
Credit utilization works like this:
Let’s say you have two credit cards — each with a $2,000 credit limit. This means that the total amount of credit available for you to use is $4,000. If you’re carrying a balance of $1,000 on each card, you’re using 50% of your available credit. This is called a credit utilization ratio.
Credit utilization rates of 30% or higher can negatively impact your credit score, while rates below 10% can help your score. Credit utilization (the amount of credit owed) is responsible for 30% of your score.
3. Length of credit history
The length of your credit history will also affect your credit score. Having a longer credit history can help your score, as it gives lenders insight into your past behavior — specifically, your track record when it comes to repaying your debt.
Generally speaking, the length of your credit history is equal to the length of time since you opened the first account on your credit report. However, the age of your oldest account, the age of your newest account and the average age of all your accounts will be considered when calculating your FICO Score.
Keep in mind that closing an old account will eventually remove that account from your credit report, and in turn, change the length of your credit history. While this has a smaller impact on your credit than other factors, it’s worth considering, since the length of your credit history makes up 15% of your score.
4. Credit mix
Your credit mix — the different types of credit you have — will also impact your credit score. Lenders want to see that you can successfully manage multiple types of debt, which typically fall into one of two categories. There are revolving accounts, like credit cards, and installment loans, which include student loans, car loans, personal loans and mortgages.
Having multiple types of credit can help your score, especially if all your accounts are in good standing. Your credit mix accounts for 10% of your credit score.
5. New credit
New credit applications can impact your score in several ways. When you apply for a new line of credit, your lender will run a hard credit inquiry to assess your creditworthiness as a borrower. Hard credit inquiries can negatively affect your credit score, though the impact from a single inquiry is usually minimal.
Applying for multiple credit accounts in a short period of time can have a stronger impact. Once again, this is due to the message it sends to lenders: that you’re either struggling to qualify for financing, or you’re seeking additional funds to keep up with your existing debt payments.
There is, however, an exception for rate shopping. If you submit multiple applications for the same type of credit within a 14-to-45 day period to find the best rates and terms, credit score models will typically count the applications as a single hard credit inquiry, minimizing the impact to your score.
New credit is responsible for 10% of your FICO Score. Still, you should keep in mind that obtaining new credit can also impact your credit mix, utilization and average account age.
What is a good credit score?
Though there are multiple credit scoring models, 90% of lending decisions are made based on your FICO Score: a three-digit number that represents your creditworthiness as a borrower. As we’ve covered, your FICO Score is determined by the information lenders report to credit bureaus. FICO Scores range from 300 to 850 and are rated as follows:
| Credit rating | Credit score range |
|---|---|
| Exceptional | 800-850 |
| Very good | 740-799 |
| Good | 670-739 |
| Fair | 580-669 |
| Poor | 300-579 |
A good credit score is 670 or higher, with anything over 740 being considered very good or excellent. A credit score below 670 may prevent you from obtaining favorable rates and terms on loans, credit cards and other lending products.
How to check your credit score
Knowing how your credit score is calculated can be helpful — but to actually improve your score, you’ll need to understand the specific factors that might be holding you back. Should you focus on paying down debt to lower your credit utilization ratio, or should you open a new type of account to diversify your credit mix?
You can check your credit score for free with LendingTree Spring. You can also request a free copy of your credit report from each credit bureau at AnnualCreditReport.com.
Frequently asked questions
Although there are multiple credit scoring methods, 90% of lenders use your FICO Score. In general, scores of 670 or higher are considered good. Having a score in or above this range may make it easier to qualify for loans and lines of credit with favorable rates and terms.
Credit scoring companies determine your credit score based on the information the big three credit bureaus — Equifax, Experian and TransUnion — receive from lenders.
Your credit score is affected by the length of your credit history, the types of credit you have, the amount of credit you’re using and any recent credit applications you’ve submitted. It’s also heavily impacted by your payment history, or the percentage of payments you’ve made on-time.
To work on your credit scores, you’ll need to understand the areas where you might improve. With LendingTree Spring, you can check your score for free and receive tailored suggestions to help you reach your full potential. Alternatively, you can also request a free copy of your credit reports from AnnualCreditReport.com.
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