Table Of Contents
- Credit score is more affected by your payment history than any other factor.
- Paying down debts and making on-time payments can increase your credit score.
- Missing payments and using over one-third of your available credit can severely decrease your credit score.
Credit scores typically range from 300 to 850. The higher your score, the better your credit is. The score is designed to represent the likelihood of you paying back a loan. The better your credit score, the more likely you are to qualify for loans or credit cards.
What Affects Your Credit Score
There are five factors that affect your credit score. Some factors carry more weight than others, but they’re all important to consider when building your credit.
Payment History
Payment history makes up 35% of your credit score, making it the most important factor in determining your credit. Your payment history includes bills from credit cards, installment loans (such as a car loan or mortgage), phone, cable, and utility companies.
Payment history shows whether your past payments have been on time, late, or missed. Late or missed payments negatively impact your credit score. Any past bankruptcies or collection accounts are also considered part of your payment history and can severely decrease your credit.
New Credit
New credit refers to credit accounts that have been recently opened in your name. New credit only makes up 10% of your credit score and only seriously affects it if you have opened multiple new accounts in a short time. Lenders may see that as a sign of financial distress.
Additionally, when you apply for a new line of credit, the financial institution will make a hard inquiry to see your credit. Hard inquiries are noted in your financial records, and multiple hard inquiries in a short time negatively affect your credit.
Used Credit
Used credit makes up 30% of your credit score. Used credit takes all of your current issued credit into account by looking at your credit utilization ratio. The credit utilization ratio is the percentage you’re using of your total available credit. When you use 30% or more, it lowers your credit score.
The significance of credit utilization in calculating your credit score cannot be overstated. It’s a common misconception that as long as you pay off your balances, how much credit you use doesn’t matter. In reality, maintaining a low credit utilization ratio is one of the best things you can do. This shows lenders that you’re not overly reliant on credit, strengthening your creditworthiness. Ideally, keeping your utilization below 30% of your available credit is recommended, but the lower, the better.
Credit Mix
Credit mix makes up 10% of your credit score. Lenders want to see a variety of credit accounts in your portfolio. Paying off a single credit card on time for years is fine, but on-time payments for multiple credit products like student loans, mortgages, additional credit cards, and car loans is better. The more diverse your accounts are, the better your credit score will be.
Length Of Credit History
The length of your credit history only makes up 15% of your credit score, but lenders may give it more weight in their considerations. The longer your credit history, the more financial information is available about you. If you have decades of on-time payments, it speaks to your trustworthiness and boosts your credit score.
Understand that while each factor contributes to your credit score, they don’t all carry the same weight. Payment history, as the most significant contributor, requires the most attention. Timely payments are a straightforward yet powerful way to maintain a healthy credit score. It’s also important to remember that credit scores are dynamic; improvements in any of these areas can positively influence your score over time.
Accounts That Impact Credit
Your credit score looks at two types of credit accounts: revolving credit and installment loans.
Revolving credit generally refers to credit cards, although certain home equity loans may also count. Revolving credit accounts have a fixed limit, and your minimum monthly payments are flexible, depending on how much you use.
Installment loans involve a fixed amount of debt and fixed monthly payments over a set period. The most common examples of installment loans are mortgages, auto loans, and student loans.
What Hurts Your Credit Score
While many things can hurt your credit score, the following issues are some of the most common.
Late Or Missed Payments
Payment history is the most essential factor in determining your credit score, and late payments can stay on your credit report for up to seven years.
Multiple Hard Inquiries In A Short Period
When you apply for a new line of credit, the institution will make a hard inquiry to see your credit. A hard inquiry remains on your financial records for up to two years, although it only decreases your credit score for a few months. However, a few hard inquiries in a short span can severely impact your credit for longer.
The one exception to this is that credit bureaus will often overlook hard inquiries if they are within a month-long period and related to one loan.
Using More Than 30% of Your Credit
High dependency on credit may indicate financial distress. Using more than 30% of your available credit negatively impacts your credit score, although lenders prefer that you use under 10%.
Defaulting
Defaulting can include bankruptcy, settled accounts, foreclosure, charge-offs (when a creditor writes your account off as a loss and closes it), and repossession. These events negatively impact your credit score and remain in your financial records for years.
Chapter 13 bankruptcy (debt reorganization) only remains on your credit report for seven years. Chapter 7 bankruptcy (eliminating all debt) is considered worse and can affect your credit for a decade.
Monitor your credit with DollarGeek
It’s never been so simple.
How To Build Credit
Whether you’re new to using credit or are looking to improve your financial health, the same strategies for building credit apply.
- Make on-time payments: By paying on time every month; you demonstrate your reliability and financial stability to future lenders.
- Know what counts as a late payment: Late payments can hurt your credit, but only if the company reports them. If you miss a credit card payment by a few days, you will likely get hit with a hefty late fee, but most credit card companies don’t make a note on your financial records until a full billing cycle (30 days) has expired. If they do report it, the notation will say how overdue the payment was. The more time goes by, the worse your credit is impacted.
- Reduce debt: Pay down debts from revolving lines of credit. By reducing your used credit, you’ll bring down your credit utilization ratio and improve your credit score.
- Diversify your credit accounts – having a single credit account, like one credit card, won’t hurt your credit, but making on-time payments to multiple lines of credit can boost your credit score.
- Get a secured card: Secured credit cards work similarly to standard credit cards but require an initial security deposit. The security deposit protects the creditor and lets them take a risk by extending credit to you. Make your payments on time and in full to eventually build up your credit.
- Join a cardholder’s account: Another way to build credit from scratch is to join a cardholder’s account as an authorized user. Credit card issuers usually report authorized users to credit bureaus, which will establish a credit score for you. You will receive your own card and can use it as normal, but your credit score will be dependent on the primary cardholder.
- Engage a Credit Repair Company: Credit repair companies work with you to raise your credit score by teaching you about how it’s calculated and negotiating with creditors and credit bureaus on your behalf. Credit repair companies may work well for people struggling with their credit scores after suffering identity theft, fraudulent accounts opened in their names, or misreported default events. This process involves identifying inaccuracies, preparing documents for credit bureaus, and explaining applicable federal consumer protection laws.
Building a strong credit score is like building a diverse financial portfolio. While on-time payments are the best thing you can do, diversifying your credit types and responsibly managing different accounts also contribute significantly. For those just starting, tools like secured credit cards and becoming an authorized user on a well-managed account can help. It’s a long-term journey; patience and consistent, responsible credit behavior are key to success.
Frequently Asked Questions (FAQs)
What Factors Drop Your Credit Score?
Your credit score can drop from late or missed payments, defaulting, declaring bankruptcy, opening new lines of credit in a short period, reducing the diversity of your credit accounts, having multiple hard inquiries from financial institutions on your credit report, and using more than 30% of your available credit.
What Information Affects Your Credit Score The Most?
Payment history makes up 35% of your credit score, making it the most important factor in determining your credit. This information includes whether any payments for credit cards or bills have been late or missed, as well as how much you’ve paid vs. what you still owe.
Why Does My Credit Score Go Down When I Pay On Time?
Just because you pay on time, it doesn’t affect your credit utilization ratio. If you recently made a large purchase, you may not have paid enough to reduce how much credit you’re using. Using more than 30% of your credit makes your credit score go down.
How Do I Get My Credit Score Up?
You can boost your credit score by using less than a third of your credit, diversifying your credit accounts, engaging a credit repair company, and making on-time payments to your existing creditors.
Find out more
- Good Credit Score Essentials: Learn what is a good credit score and its importance.
- Building Credit Effectively: Explore ways to build credit.
- Credit Score Monitoring Services: Consider the best credit score monitoring services for tracking changes.
- Credit Repair Overview: Understand what is credit repair.
- Comparing Credit Repair Companies: Get tips for comparing credit repair companies.
- Removing Collections from Report: Learn about how to remove collections from your credit report.
- Removing Hard Inquiries: Understand how to remove hard inquiries from your credit report.
- Credit Score Factors Comparison: Compare FICO and VantageScore.
