In this article, we will explore five key factors and how each one affects your credit score. If you’ve ever applied for any form of credit, you’ve probably heard the words “credit score” used often. You know it’s important, but knowing what affects your credit score is also important.
Do you want to build your credit from scratch or keep it in good shape? The Consumer Financial Protection Bureau conducted a recent survey and found that nearly 1 in 5 consumers have no idea what affects their credit score. You can take control of your financial future with confidence.
Your credit score plays a crucial role in your financial life. It can impact everything from getting approved for a loan to the interest rates you pay. Understanding the five factors and how each one affects your credit score will go a long way in your finances.
Let’s break it down for you. No jargon. Just the facts on what goes into your score.
What is a Credit Score and What Affects it?
Your credit score is a three-digit number, usually between 300 and 850, representing your ability to repay debt. It tells lenders how likely you are to repay any borrowed money.
A credit score is used in over 90% of lending decisions. Now let’s get into the five main factors affecting your credit score and how much weight each one carries.
1. Payment History Affects your Credit Score
This is a big one. Your payment history makes up 35% of what affects your credit score. Lenders want to know if you’ve been paying your bills on time. It includes credit cards, loans, mortgages, medical bills, and utilities.
What hurts your score?
- Late payments
- Missed payments
- Accounts sent to collections
- Bankruptcies and foreclosures
According to FICO, a payment of 30 days or more late can stay on your credit report for up to seven years and may drop your score by as much as 100 points. Here are some measures to adopt to protect your score:
- Set up automatic payments or reminders
- Pay at least the minimum amount due every month
- If you do miss a payment, make it as soon as possible. The longer the delay, the worse the damage
2. Amounts You Owe Affects Your Credit Score
This factor is how much debt you use compared to your available credit limit. What is your credit utilization ratio? Even if you pay your bills on time, maxing out your credit cards can make you look like a risky borrower. Lenders like to see that you’re using credit wisely, not relying on it to get by. This is how it affects your credit score.
Keep your credit utilization below 30% of your total available credit. Under 10% is even better if you want to boost your score.
For example, if you have a credit limit of $5,000, try to keep your balance under $1,500. A $500 balance on a $5,000 limit is good, but a $4,500 balance is not advisable.
Even if you pay your card in full every month, high balances can still get reported mid-cycle. Paying your bill early or making multiple payments each month can help.
3. Length of Credit History Affects Your Credit Score
This factor is straightforward. It makes up 15% of what affects your credit score. The longer you’ve had credit, the better. Lenders want to see a track record. A long history of responsible credit use shows you know how to manage debt over time.
What is the age of your newest and oldest accounts? How do you improve your score here?
- Don’t close old credit cards, especially your oldest one.
- Be patient, as time is your friend here.
- If you’re new to credit, becoming an authorized user on a parent or partner’s long-standing account can help you fast-track this.
4. Credit Mix Affects Your Credit Score
This factor makes up 10% of what affects your credit score. It checks the different types of credit you’ve used. Lenders like to see that you can handle a variety of credit types. Can you handle revolving credit like credit cards, and installment loans like car loans, student loans, and mortgages?
Having a healthy mix suggests you can responsibly manage multiple financial obligations. A good blend of credit cards, personal loans, auto loans, and/or a mortgage (if applicable). Don’t open accounts you don’t need to improve your credit mix. It’s not worth the risk.
5. New Credit Inquiries Affects Your Credit Score
An unnecessary new credit inquiry makes up 10% of what affects your credit score. It looks at how often you apply for new credit. Each time you apply for a new line of credit, the lender performs a hard inquiry on your credit report. Too many of these in a short time can signal financial trouble.
What counts as a hard inquiry?
- Applying for a new credit card
- Applying for a car, mortgage, or personal loan
- Getting financing for a major purchase
What doesn’t count as a hard inquiry?
- Checking your credit
- Employer background checks
- Pre-approved credit offers
A single hard inquiry lowers your score by 5 points or less. Multiple inquiries within a 14 to 45-day window for the same type of loan are usually treated as one. Feel free to shop around.
Keep Your Credit Score Healthy
Do you want to build strong credit? Understand the factors that influence it. Managing them wisely can boost your score and improve your overall financial health. Now that you know what affects your credit score, here are some quick tips to keep it in shape:
- Pay your bills on time.
- Keep credit card balances low.
- Don’t open too many new accounts too quickly.
- Maintain old accounts where possible.
- Check your credit reports for errors
Conclusion
Your credit score tells how well you manage your credit and what affects it. Good habits over time pay off big.
By understanding the five key factors of payment history, credit utilization, credit age, credit mix, and new credit, you can take control of your score, one decision at a time.
Whether you’re trying to qualify for a mortgage, get better rates on a car loan, or just want financial peace of mind, working on your credit is always worth the effort.