Credit Repair

5 Factors That Affect Your Credit Score

If you’re getting a mortgage, buying a new car or applying for a credit card, you’ll want to know your FICO® credit score, a three-digit number that lenders use to determine if they should loan you money and, if so, at what interest rate.

Your FICO Score ranges from 300 to 850. A lower number signifies you may be a greater credit risk. FICO considers a number between 670 and 739 a “good” credit score, 740-799 is “very good” and 800-850 is excellent.

“Your credit score is like a crystal ball that lenders use to look into the future and see if you’re a good credit risk,” said Wayne Sanford, owner and president of Credit Bureau Investigations, a McKinney, Texas-based firm that provides credit counseling and credit restoration services to consumers.

But what factors go into determining your credit score? And how can you use that knowledge to boost your score and qualify for the best loans and credit cards, with low interest rates?

How your credit score is determined

Here are five key factors that determine your credit score.

Factor No. 1: Payment history

Lenders look at your credit score to determine if you are likely to pay back the money you borrow. Therefore, your payment history is the most important factor in your credit score, accounting for 35% of the total.

Missed a credit card payment by a few days? Don’t stress. Most lenders don’t report late payments to the credit bureaus until you are 30 days past due. That’s the good news.

The bad news? There is no way of determining exactly how many points you’ll lose for a late payment, but there are some general rules.

The larger the payment, the more points you will lose. So a late $400 car loan payment will hurt your credit score more than a $25 past due amount on a credit card. Additionally, if you have a high balance on an account and miss a large payment, you will lose more points.

If there is a short time frame between your last late payment and your most recent, you will lose more points. Multiple late payments over a few months indicates to creditors that you could be in over your head with debt or having financial problems.

Unfortunately, if you have a high credit score, you could stand to lose more from one late payment than someone with a lower score.

That’s because a missed payment could be an indication that you are beginning to have problems managing your debt. Creditors may be reluctant to extend more credit to you at the same low interest rates you’ve enjoyed as a consumer with excellent credit until you prove you have your money under control again.

Fortunately, once you bring your account current and continue making on-time payments, your score will slowly rise.

“After six-to-12 months of on-time payments, you’ll earn back about half the points you lost from a late payment,” Sanford said.

The reason you won’t regain all the points? “Before, you didn’t have any late payments on your credit report, and now you do.”

After seven years from the date of the missed payment, a late payment will disappear from your credit reports and no longer affect your credit score.

Factor No. 2: Credit utilization

To determine if you’re a good credit risk, lenders want to know that you pay your bills on time. But they also want to make sure you use credit responsibly.

Your credit utilization ratio, the money you owe compared to the available credit on your revolving accounts, shows you know how to manage credit.

The second-most important factor in determining your FICO credit score, your credit utilization ratio makes up 30% of your credit score.

But what’s the optimal credit utilization ratio?

Ideally, you’ll boost your credit score by using your cards, paying your balances in full at the end of each month to build your payment history and keeping your credit utilization at or near zero.

“You don’t want to carry a balance at all if you can help it, because then you’ll pay interest,” said Beverly Harzog, consumer finance analyst for U.S. News & World Report. “You can build your credit without paying interest charges.”

If paying your balance in full every month isn’t possible, make sure your total credit utilization ratio remains below 30%. “But if you want to maximize this factor of your credit score — for instance, because you’re applying for a mortgage — keep it below 10%,” Harzog said.

Factor No. 3: Length of credit history

It may not seem fair to young people looking to build their credit or immigrants who have never had credit in the U.S. before, but the length of your credit history accounts for 15% of your credit score.

That’s why the average credit score rises by age bracket.

The length of your credit history matters because FICO looks at the average age of your accounts to see how long you’ve been managing credit responsibly without any account closures, bankruptcies or charge-offs.

That’s why smart consumers will keep their older credit card accounts open, even if they don’t have a balance. Closing older accounts will reduce the average age of your accounts, lowering your credit score.

Closing a card with no balance can also affect your credit utilization ratio. For the purposes of your credit score, it’s better to keep those accounts open, use them occasionally and get the benefit of the untapped credit line.

The exception? If you have a credit card with an annual fee that you aren’t using to rack up rewards points, you may want to consider a card with no annual fee instead.

Factor No. 4: New credit

Just as older credit card accounts positively affect your FICO Score, newer accounts can lower your score. In fact, taking steps to open new accounts can reduce your score by a few points.

New credit accounts, along with credit inquiries, make up 10% of your FICO Score.

The good news is applying for new credit, or opening a new account, will only cause a small blip in your credit score for a few months. As you begin using your new card and making on-time payments, your score will rise.

Also, pulling your own credit reports or checking your credit score won’t lower your score. It’s called a “soft” pull, or “soft” credit inquiry.

However, when a bank, mortgage company or credit card issuer checks to see if you qualify for a loan, this is called a “hard inquiry.” Hard pulls will lower your FICO Score, but you will gain those points back after a year, when the inquiries drop off your credit reports.

If you are planning a big purchase, such as a mortgage or auto loan, you want to maintain your high credit score while shopping around for the best rates.

Lenders will count all the inquiries within one shopping period, or time span of either 14 or 45 days, as a single hard pull, which won’t appear on your credit report or affect your credit score for another month, giving you plenty of time to make a decision and choose the best loan product for your situation.

If you open multiple accounts within the same month, lenders will consider this a red flag. If you are applying for lots of credit cards, lenders assume you might be expecting financial difficulties, such as a layoff, or preparing for a spending spree.

Lenders also worry that you will overextend yourself if you have too much available credit, causing you to miss payments.

Factor No. 5: Credit mix

Finally, your “credit mix,” or the diversity of your accounts, makes up another 10% of your credit score.

Lenders like to see that you can manage different types of credit, including revolving accounts like credit cards, and installment loans such as an auto loan or mortgage. Even your student loans can help boost your credit score by showing diversity in your accounts.

But some types of credit carry more weight than others. “A major credit card that you can use anywhere tells lenders more than an installment loan with fixed payments or a retail card you can only use in one store,” Sanford said.

Additionally, premium cards like the Platinum Card from American Express have a greater impact on your score than credit cards available to consumers with good or fair credit, he added.

Since your credit mix only makes up 10% of your credit score, there’s no need to stress about your accounts. “Essentially, creditors want to see that you have credit cards to show how you use credit, and installment loans to show that you can make consistent payments,” Sanford said.

Manage your credit, grow your wealth

Keeping the five factors that make up your credit score in mind when you pay your bills, apply for new credit and use your credit cards can help you raise your FICO Score over time.

“Don’t obsess over your credit score,” Harzog said. “It changes all the time.”

But by paying attention to the foundation, paying your bills on time and keeping your utilization rate under 30%, you’ll slowly build credit, opening up a new world of lower interest rates and better credit card rewards to put more money in your pocket.


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