Credit Scores: The 5 Main Factors that Affect Your Credit Scores
1) Payment History
Payment history is the most significant factor affecting your credit score, accounting for about 35% of the total score. This factor reflects your track record of paying back your debts, including credit cards, loans, and mortgages. Lenders want to see that you can manage and pay off your debts responsibly. Late payments, defaults, and bankruptcies can severely damage your credit score. Even a single missed payment can lower your score, especially if it’s recent. To maintain a positive payment history, always pay at least the minimum amount due on time. Setting up automatic payments or reminders can help you avoid missing due dates. Additionally, if you have past due accounts, bringing them current and consistently making timely payments will gradually improve your score. Keeping a clean payment history over time shows lenders that you are reliable and lowers your perceived risk.
2) Credit Utilization Ratio
Your credit utilization ratio, which is the second most influential factor, makes up about 30% of your credit score. This ratio measures how much of your available credit you’re using at any given time. To calculate it, divide your total credit card balances by your total credit limits. A lower ratio indicates that you’re not heavily reliant on credit, which is favorable to lenders. Aim to keep your utilization below 30% to maintain a good score, but lower is always better. For example, if you have a total credit limit of $10,000, try to keep your balances below $3,000. Paying down balances and requesting higher credit limits can help improve this ratio. Be cautious not to close credit card accounts as this can reduce your total available credit and increase your utilization ratio. Monitoring and managing your credit utilization carefully can have a substantial impact on your overall credit score.
3) Length of Credit History
The length of your credit history contributes about 15% to your credit score. This factor considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. Generally, a longer credit history is better because it provides more information for lenders to evaluate your creditworthiness. Keeping older accounts open and active can positively affect this aspect of your score. Even if you don’t use these accounts frequently, they contribute to the overall length of your credit history. Avoid closing old accounts, as this can shorten your credit history and negatively impact your score. Additionally, when opening new accounts, be mindful that they will lower the average age of your accounts. By maintaining a long and stable credit history, you can demonstrate to lenders that you have a reliable track record of managing credit over time.
4) Credit Mix
The variety of credit accounts you have, known as your credit mix, makes up about 10% of your credit score. Lenders like to see that you can manage different types of credit responsibly, including revolving credit (like credit cards) and installment credit (like mortgages, auto loans, and student loans). Having a diverse mix of credit types shows that you can handle various financial responsibilities. While it’s not necessary to have every type of credit account, having a mix can be beneficial. However, don’t open new accounts solely to improve your credit mix, as this can lead to unnecessary debt and hard inquiries that can temporarily lower your score. Focus on managing your existing accounts well and only taking on new credit when necessary. A well-managed mix of credit accounts can enhance your credit profile and positively influence your credit score.
5) New Credit Inquiries
The number of new credit inquiries on your report accounts for about 10% of your credit score. When you apply for new credit, lenders perform a hard inquiry, which can temporarily lower your score. Multiple hard inquiries in a short period can suggest that you’re taking on too much new debt, which increases your risk in the eyes of lenders. To minimize the impact, avoid applying for new credit unless necessary. If you are rate shopping for a mortgage, auto loan, or student loan, do so within a short timeframe (typically 14 to 45 days, depending on the scoring model) so that multiple inquiries are counted as one. This strategy limits the negative impact on your score. Additionally, be aware of the impact of soft inquiries, such as pre-approval checks, which do not affect your credit score. Managing new credit inquiries wisely helps maintain your credit score and shows lenders that you are not overly reliant on borrowing.