5 Factors That Impact Your Credit Scores

You don’t need a degree to understand what is affecting your credit score. The good news is that it is actually quite simple.

Lenders use credit scores to figure out a borrower’s likelihood of repaying debt. Credit scores range from 300 to 850, with higher scores indicating a lower risk of default. The five main factors used to calculate credit scores are payment history, credit utilization, credit history length, mix of credit types, and new credit inquiries.

Your credit score changes along with your financial profile. It’s useful to know what factors and types of accounts affect your credit score so you can improve it over time.

Top 5 Credit Score Factors

There are a few different things that can affect your credit score. Some common factors are listed below.

1.   On-Time Payments – 35%

The amount of time you have been paying your debts on time is crucial for a good score. It determines how responsible you are as a borrower and also informs creditors that you can settle debts on time. If you consistently pay off monthly dues such as mortgage payments, insurance payments, and bills, etc., your score builds up.

If you miss a payment, your credit score will go down. If you miss multiple payments or have something like a bad debt write-off, your credit score will go down a lot.

Your payment history plays a big role in your credit score. For FICO, your payment history makes up 35% of your credit score.

2.   Capacity Used – 30%

If you have a lot of debt, it will lower your credit score.

Credit rating agencies analyze a few key factors to ascertain an individual’s credit score, one of which is the debt-to-income ratio. The greater the monthly payments are in relation to one’s income, the more it will lower the credit score.

The credit balance compared to the credit limit affects the score. A rule of thumb is to maintain a balance to less than 30% of the limit. If the balance goes over 30% and stays there, the credit score begins to get affected negatively.

The outstanding balance owed is 30% of the FICO score.

3.   Type Of Credit – 10%

The first is called “revolving debt” and this includes credit cards and store cards. The second is called “installment debt” and this includes things like auto loans and student loans. The type of debt that you put on your card affects your credit score. Things like credit cards and store cards fall under the category of “revolving debt,” while auto loans and student loans are classified as “installment debt.”

First, there is debt that revolves, like the one you probably have on your credit card. With this type of debt, you can take on credit based on your cash flow needs and pay interest each month. When you pay off an amount more than your month’s interest, it reduces the outstanding balance. There is a minimum amount that must be paid for each period, but there is no fixed date for the repayment of the full credit, hence the name, revolving credit.

There are two types of credit: installment-based credit, where you make monthly payments towards both principal and interest for a fixed period, and revolving credit, where you have a maximum amount you can borrow (up to your credit limit) and minimum payments each month that go towards interest and principal.

The interest rate on revolving credit is generally higher than the interest rate on installment credit. Your monthly mortgage payments or your mobile carrier’s monthly payments are examples of installment credit.

Credit debt that is used to purchase assets such as a car or home is generally considered to be good debt. In contrast, credit balances that are used to buy items like groceries, clothing, and fashion accessories are typically considered to be bad types of debt. Good debt usually has a less negative impact on your credit score than bad debt.

The type of debt you have can account for 10% of your FICO score.

4.   New Credit Inquiries – 10%

If you open a lot of lines of credit in a short period of time, it looks like you’re desperate for money. This reflected negatively in your score. The number of inquiries you make for credit affects your score. Every time you try to get a new loan, your lender makes a check against your card. This check becomes a permanent part of your card’s history. If you open a lot of lines of credit in a short period of time, it looks like you’re desperate for money. This reflected negatively in your score.

If you only check your credit score once in a while, it won’t have a big effect. But if you check it multiple times in a short period, like three months, it could mean you’re having financial trouble. This is a red flag for credit agencies, and your score could go down even if all your credit applications are approved.

If your credit request is denied, your score immediately drops because you are now considered a high-risk borrower.

There are ways to work around a low credit score. Some lenders offer to make a check against your credit that would not appear on your card history. In this case, your score is not affected even if the loan is denied.

Credit rating agencies will only look at inquiries made in the past 12 months when deciding your credit score. Inquiries will be completely removed from your credit report after 24 months.

FICO assigns a value of 10% to new inquiries.

5.   Length Of Credit History – 15%

The length of your credit history is also a factor in your credit score. If you have had a credit history for ten years, your score is likely to be higher than if your credit history is only one year old.

A long credit history is generally seen as better because it implies some experience with handling credit. This, in turn, makes lenders more willing to offer credit on favorable terms since the borrower is likely to handle future borrowing responsibly as well.

Age of credit is determined in three parts.

  1. How long have you had accounts?
  2. How long have specific types of accounts been open?
  3. The period that has passed since those accounts have been last used.

A new bank account will lower the average age of your credit history. This is because a new account is factored into the calculation of your average age of credit history. For example, if you have had a checking account for five years and get a credit card for the first time today, your average age of credit history would be 2.5 years. This is a simplified calculation, and the average age is determined with more factors under FICO.

How long you have had credit accounts for makes up 15% of your FICO score.

FICO factors that go into your credit score.

FICO Factors

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New Credit: 10%
  • Credit Mix: 10%

Types of Accounts That Impact Credit Scores

Credit files typically contain information on two types of debt: installment loans and revolving credit. This information is important for calculating credit scores, as it provides a record of debt and payment history.

  • Installment credit usually comprises loans where you borrow a fixed amount and agree to make a monthly payment toward the overall balance until the loan is paid off. Student loans, personal loans, and mortgages are examples of installment accounts.
  • Revolving credit is typically associated with credit cards but can also include some types of home equity loans. With revolving credit accounts, you have a credit limit and make at least minimum monthly payments according to how much credit you use. Revolving credit can fluctuate and doesn’t typically have a fixed term.

What Can Hurt Your Credit Scores

As we discussed above, certain core features of your credit file have a great impact on your credit score, either positively or negatively. The following common actions can hurt your credit score:

  • Missing payments. Payment history is one of the most important aspects of your FICO® Score, and even one 30-day late payment or missed payment can have a negative impact.
  • Using too much available credit. High credit utilization can be a red flag to creditors that you’re too dependent on credit. Credit utilization is calculated by dividing the total amount of revolving credit you are currently using by the total of all your credit limits. Lenders like to see credit utilization under 30%—under 10% is even better. This ratio accounts for 30% of your FICO® Score.
  • Applying for a lot of credit in a short time. Each time a lender requests your credit reports for a lending decision, a hard inquiry is recorded in your credit file. These inquiries stay in your file for two years and can cause your score to go down slightly for a period of time. Lenders look at the number of hard inquiries to gauge how much new credit you are requesting. Too many inquiries in a short period of time can signal that you are in a dire financial situation or you are being denied new credit.
  • Defaulting on accounts. The types of negative account information that can show up on your credit report include foreclosure, bankruptcy, repossession, charge-offs, settled accounts. Each of these can severely hurt your credit for years, even up to a decade.

How to Improve Your Credit Score

If you want to improve your credit score, start by understanding why your score is low. Once you know the reasons, you can work on developing habits that will improve your score over time. It may take some time and effort, but it will be worth it in the end.

Start by getting a free copy of your credit report and score. This will give you an idea of what needs to be improved. Focus on the areas that are dragging down your score, and work on improving them.

There are some things you can do to help improve your credit score.

  1. Pay your bills on time. Because payment history is the most important factor in making up your credit score, paying all your bills on time every month is critical to improving your credit.
  2. Pay down debt. Reducing your credit card balances is a great way to lower your credit utilization ratio, and can be one of the quickest ways to see a credit score boost.
  3. Make any outstanding payments. If you have any payments that are past due, bringing them up to date may save your credit score from taking an even bigger hit. Late payment information in credit files include how late the payment was—30, 60 or 90 days past due—and the more time that has elapsed, the larger the impact on your scores.
  4. Dispute inaccurate information on your report. Mistakes happen, and your scores could suffer because of inaccurate information in your credit file. Periodically monitor your credit reports to make sure no inaccurate information appears. If you find something that’s out of place, initiate a dispute as soon as possible.
  5. Limit new credit requests. Limiting the number of times you ask for new credit will reduce the number of hard inquiries in your credit file. Hard inquiries stay on your credit report for two years, though their impact on your scores fades over time.

What to Do if You Don’t Have a Credit Score

There are a few options available if you want to establish credit but don’t have a credit score. Building a credit score can take time, but these options can help you get started.

  • Get a secured credit card. A secured credit card can be used the same way as a conventional credit card. The only difference is that a security deposit—typically equal to your credit limit—is required when signing up for a secured card. This security deposit helps protect the credit issuer if you default and makes them more comfortable taking on riskier borrowers. Use the secured card to make small essential purchases and be sure to pay your bill in full and on time each month to help establish and build your credit. Click here to learn more about how secured cards work and here to browse Experian’s secured card partners.
  • Become an authorized user. If you are close with someone who has a credit card, you could ask them to add you as an authorized user to jump-start your credit. In this scenario, you get your own card and are given spending privileges on the main cardholder’s account. In many cases, credit card issuers report authorized users to the credit bureaus, which adds to your credit file. As long as the primary cardholder makes all their payments on time, you should benefit.


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