What Are the 5 Factors That Affect Your Credit Score?
January 25, 2024
A good credit score can open doors to more financial opportunities. Lower interest rates, access to high credit limits, and approvals for mortgages or business loans are just a few things that generally require a higher credit score.
So, what makes your credit score go up? How can you change a poor score to a good one? It can help to know the factors that affect a credit score. Read on to learn more.
What is a Good Credit Score?
Each scoring model varies somewhat, as each of the credit reporting agencies has their own version. Generally speaking, a "good" credit score is one in the top-scoring range. So, for a FICO® score (which goes from 300 to 850), anything between 670 and 739 is considered good. Higher scores are considered “very good” or even “excellent"[1].
VantageScore® considers anything between 661 and 780 good, with high scores considered "excellent."
The Five Factors That Affects Your Credit Score
A single action can get you on the path to a good credit score, but regular good habits have the biggest effect. Over time, however, you can see positive changes based on these factors. The FICO® model uses the following factors to determine whether you have a good credit score.
1. Payment History: 35%
You may have been told that making on-time payments is the single most important thing you can do to have good credit. That’s because your payment history is the largest part of your score. By responsibly paying bills and not letting anything go past due, you can keep negative marks off your credit report and keep this portion of your score healthy.
If anything goes past 30 days late or gets sent to collections, it can negatively affect your score[2]. The same goes for bankruptcies or settlements, which can make it hard to get your score back to “good” status.
2. Amounts Owed / Credit Utilization: 30%
How much of your current credit card limit are you using? How much have you paid off on that car loan? The answers to these questions affect the amounts owed portion of your score. It has a lot to do with something called “utilization ratio.”
A utilization ratio is the amount of credit you have available compared to the amount you owe. If you have a $5,000 balance on a $10,000 credit card account, your utilization ratio will be 50%. Most scores reward consumers who can keep their total ratio under 30% across every line of credit. Those with a ratio of 10% or less can see the best scores (good or even excellent[3]).
Even if you hardly use any of your credit lines with most of your cards and keep an overall ratio of 30% or less, maxing one out can harm the "amounts owed" category.
3. Length of Credit History: 15%
The number of years you've had your oldest credit card or loan plays a factor in this portion of your credit score. If you've been paying for 20 years on your mortgage, it will look better than having your very first loan opened just last month.
The scoring model looks at the age of your oldest account, the newest account, and the average age of all accounts. So, each new account you open will temporarily drop the average age, and many new accounts can significantly lower your average account age.
4. New Credit: 10%
Opening up a new account won’t affect your score much, but it could drop it below the good range.
Why? Your credit history is reviewed when you apply for a loan or credit account. This type of inquiry is considered a "hard inquiry," and it can decrease your score simply by having someone pull your credit.
However, it’s common for people who shop for a mortgage or car to have their credit pulled by different banks so they can find the right loan. The score doesn’t penalize people for having multiple inquiries pulled at once, usually within a couple of weeks of each other. You’ll see a small, short-term decrease in your score, but this will eventually fall off.
5. Credit Mix: 10%
Another name for this ranking factor is “credit mix.” It’s a way of assessing how varied your loans and credit lines are. The score takes into account both revolving lines of credit and installment loans. If you have some of both, your score will be higher than if you didn’t.
Revolving lines of credit are credit cards and similar lines of credit. Installment loans are loans you pay back over time in equal payments (like a mortgage or a car loan.) Once an installment loan is paid off, the account gets closed.
While having both types of credit can raise your score, it only affects 10% of your total credit score. Your credit mix is mostly used by lenders who want to see that you can handle the type of credit they offer. A mortgage lender, for example, may want to see an installment loan in the mix to ensure you can pay off your loan in a timely and responsible manner.
What Factors Do Not Affect Your Credit Score?
Things that won’t change your credit score include:
- Your income or the amount in your bank accounts. It only matters that the money you do have is used to pay debt and bills responsibly.
- Checking your own credit history. You are allowed one free inquiry per year from each of the three reporting bureaus, which doesn’t affect your score. It’s considered a soft inquiry even if you check it more often through a credit service. Seeing your score will also not affect it.
- Your age, race, marital status, religion, occupation, or other personal details. Lenders can’t use this information to determine creditworthiness, and it’s not reflected in your credit score.
- Debit card activity. Debit cards may have some protections similar to credit cards, but they are not credit products and don’t count toward your credit history. How you use it won’t be reflected in your score.
A Good Credit Score is Within Reach
If you are new to credit or have had poor credit in the past, you still have the chance to raise it over time. Whether you want to buy that new home in Indianapolis or refinance your car, having a good score may improve your approval odds and could qualify you for lower rates. Check out our money management resources for more ideas for budgeting, paying bills, and getting the right credit products.
[2 https://www.experian.com/blogs/ask-experian/how-is-your-credit-score-determined/
[3]https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/
