Today, the sages behind MoneyWizard rank the five most crucial credit scoring factors to provide you with a little insight into how they impact your credit score.
Payment HistoryYour payment history—whether you’ve paid your past credit accounts promptly or late—is the most important factor in credit scoring, comprising ~35% of your overall score. Maintaining a history of on-time payments will work in your favor; however, even a single missed payment may affect your credit score. Lenders want the assurance that you can pay back your debt —and on time—when they’re assessing you for new credit. How much a late payment will impact your credit score may also vary based on how much you actually owe. But don’t worry; start making on-time payments to actively reduce the amount owed and you’ll see the impact of payment history on your scores diminish over time. If you’re finding it difficult to make payments at all, it could become a matter of public record (like a tax lien or foreclosure) that shows on your credit report. Because on-time payment history is one of the most important factors in your credit score, companies like Experian allow you to add additional on-time payments to your credit report by linking your bank account—for free. That means you can get credit for bills like Netflix®, phone and utilities. According to Experian, users who received a boost improved their FICO® Score by an average of ~13 points. Get Experian Boost today. By maintaining a positive payment history on your credit accounts, you can assure current and potential lenders that you can repay your loans and be well on your way to a good credit score. Ultimately, you want a higher credit score to increase your chances of qualifying for credit and scoring the best interest rates.
Credit Utilization/Amounts OwedAccounting for ~30% of your credit score, your credit utilization is an important factor that you may improve or damage your credit health. But what does credit utilization mean? It’s the total amount of loans and credit you’re using compared with your overall credit limit. A lower credit utilization rate is better for your FICO scores. While you should pay more attention to your overall credit utilization rate, your utilization on individual credit cards may also affect your credit score. Having many accounts with balances may indicate that you’re a riskier bet for lenders. One of the easiest ways to tame your credit is by aiming to maintain a low utilization rate —anything below 10% is fine. A lower utilization ratio means that your credit risk is lower – which leads to higher credit scores. Remember, you may have to make prompt payments throughout your billing cycle if you want to use a lot of credit while maintaining a low utilization rate.
Credit Age/Length of Credit HistoryThe average length of time you’ve held your credit accounts comprises ~15% of your credit score. While an older credit age will favor your credit score, other factors relating to the length of your credit history may also have an impact. These include:
- The age of your newest account
- The age of your oldest account
- Average age of your accounts
- How recently you’ve used an account
Types of Credit/Credit MixYour credit mix refers to the variety of credit products you have, including credit cards, auto loans, installment loans, student loans, and mortgage loans. The types of credit you have constitute 10% of your FICO score, so having a diverse portfolio will improve your credit scores. Credit scoring models look at the types of accounts and how many of each you have in your portfolio to assess how well you can manage multiple credit products. We wouldn’t recommend taking out a loan and paying interest to simply add to your credit mix. And although there’s no clear-cut answer on the number of credit products you should have, we recommend having more than one.
New CreditEach time you apply for and open a new account, an inquiry is made on your credit report to indicate an application. Inquiries account for ~10% of your FICO score. While one or two inquiries won’t have a huge impact, several inquiries performed within a short time frame can take several points off of your score. Always consider whether a soft or hard inquiry will be performed when applying for new credit. Hard inquiries will cause your score to drop a few points—though it should recover quickly. Fortunately, the good news is that only the inquiries made within the last 12 months count toward your credit score. Keeping your applications to a minimum will preserve your score.
Other Things That May or May Not Influence Your Credit ScoreKnowing what does or doesn’t go into your credit report is essential for your long-term financial health. And with many common credit score and credit reports misconceptions, let’s separate fact from fiction. Here are some less obvious situations that may influence your credit score.
- Credit limit increase request. Your card issuer will perform a hard pull of your credit when you request an increase in your limit. This may reduce your score temporarily by a few points.
- Defaulting on accounts. Negative accounting information like a foreclosure, repossession, or bankruptcy can show up on your credit report and severely hurt your score for years.
- Using too much of your available credit. A high credit utilization rate is an indication of being too dependent on credit. Lenders want you to keep your credit utilization at less than 30%. Keeping it less than 10% is even better.
- Bank overdrafts. Contrary to the popular belief, bank overdrafts won’t hurt your credit score.
- Utility and phone bills. Your utility payments, rent payments and phone bills aren’t reported to credit bureaus, so they won’t count toward your score.
- Checking your credit score yourself. Credit score checking services and credit-reporting tools from your financial institution won’t affect your credit score. This is considered a soft inquiry that’s only visible to you—not lenders.
- Anything from a non-credit account. Insurance, investments, and other accounts that involve zero borrowing won’t show up on your credit report.
Your Next StepsGood credit is essential for excellent financial health—it can help you score great offers from lenders and save thousands of dollars in the long term. Constantly review your credit reports to see how you’re faring on all the scoring factors above. If your current credit isn’t impressive, don’t despair. Focus your credit-building efforts on prompt payments and maintaining low balances relative to your credit limit—these factors have the greatest impact on your scores. You might not need your credit right away, but it’s a valuable asset for managing your financial life.
Your credit score can have a big impact on your financial future. Sign up for Experian to get your credit score and credit report for free! Join millions of other Americans and get the tools you need to help understand, manage, and master your credit—in under 3 minutes. Checking your credit score with Experian won’t hurt your score.