What Affects Your Credit Score? FICO Score Factors
Five credit factors affect your credit score: payment history, credit utilization, types of credit, age of credit, and the number of hard inquiries. Other factors don’t impact your credit score as much, such as whether you carry a small balance on your credit card.
Consumer credit scores were first developed by the Fair Isaac Corporation (FICO). Although there are many different credit scoring models in existence—including VantageScore as well as proprietary models developed by different lenders—people who talk about credit scores today, are usually referring to your FICO score.
Your credit score affects almost every part of your financial life, from whether you can get a personal loan, qualify for a car loan to whether you can even rent an apartment. Even the deposit you put down on utilities can be affected by your credit score.
Your credit score changes as creditors and other companies report your borrowing and payment behavior to major credit reporting agencies, including Equifax, Experian, and TransUnion. Because information is continually being reported to the credit bureaus, it’s imperative you make payments on time and are responsible whenever you borrow money.
In this guide:
The 5 Credit Score Factors You Need to Know
Any positive or negative feedback you get on your borrowing behavior and on your payment history could have an impact on your credit score. While you may not know all of the factors that impact your credit history, there are a few basic principles to keep in mind—like that paying bills on time and only using a fraction of your available credit.
In general, though, there are five key categories that determine your credit score:
1. Your Bill Payment History (Have You Been Paying On Time?)
This section of your credit report could cause the most damage to your credit score. Your record of payments accounts for 35% of your score, and it refers to whether you’ve always paid on time, if you’ve ever had a late payment submitted 30, 60, or 90 days after it was due, if you’ve ever missed payments altogether, and whether you have any judgments against you, such as a foreclosure or bankruptcy.
To make sure you do well on this most important factor, be sure to submit monthly payments when they are due and never let any of your credit accounts fall into delinquency.
2. Your Credit Utilization Ratio (How Much Credit You Use)
Your credit utilization ratio accounts for 30% of your FICO score. It refers to your ongoing credit balance versus the total credit available to you. To calculate your credit utilization ratio, divide your outstanding balance owed versus your total credit limit. For example, if you have one credit card with a credit limit of $10,000 and you owe $3,500, your credit utilization ratio is 35%. Anything above 30% is too high and will lower your credit score, so try not to charge too much across your accounts.
3. Your Credit Mix (It Helps to Shake it Up)
This accounts for 10% of your FICO score. It refers to how many different kinds of credit you have. For example, student loans are a type of installment loan—a fixed balance you repay over a fixed loan term.
Credit card debt is revolving debt—it can increase or decrease as you use your card. Revolving debt is considered riskier, so you’ll want to pay down this type of debt before eliminating other loans.
Since a mix of different types of credit is preferred, your score is likely to be better if you have mortgages, car loans, credit cards, personal loans, student loans, and other types of borrowing reported rather than if you have only one kind of debt.
>> Read more: How Do Student Loans Affect Your Credit Score?
4. Your Credit History (New and Old)
This accounts for 15% of your credit score. It refers to the average age of your accounts and how long you’ve been using credit. A longer credit history is better since it gives lenders more data to work with and shows you’ve (hopefully) been a responsible borrower over a long period of time. Avoiding opening too much new credit at one time and not closing old accounts is key to doing well on this component of your score. A good practice is to open up a no-fee credit card account when you’re young and keep it open for the foreseeable future, even if you open and close better rewards credit card accounts later in life.
Your Hard Inquiries (Who’s Looking?)
Applying for credit incurs a hard inquiry on your credit report. A hard inquiry means a lender has looked at your credit in anticipation of allowing you to borrow. While some lenders let you shop around and compare interest rates with soft inquiries only—which don’t affect your score—hard inquiries go on your report when you actually complete an application for a loan. The inquiry will stay there for two years.
It’s important to look for lenders that do allow soft inquiries when you’re comparing loan rates. And remember not to apply for too many loans at one time, as too many hard inquiries cause your credit score to drop.
>> Read More: Hard vs Soft Credit Inquiries Explained
Factors That Don’t Affect Your Credit Score
While you may think you need to be rich to have a decent credit score, your income doesn’t have a direct impact on the score you’ll receive. While having money doesn’t hurt, since it makes it easier to pay bills on time and get approved for different loans, people without a ton of money can still earn very high scores—as long as they’re responsible with their credit. On the other hand, there are plenty of people with six-figure incomes who aren’t very responsible with their debts and who have poor credit scores.
Income isn’t the only factor that has no direct impact on your credit. Here are three other factors that won’t directly impact your score:
- Having debt: Being in debt doesn’t necessarily crater your credit score. In fact, carrying different kinds of loans and paying them back on time can help boost your score since it shows credit reporting bureaus that you’re good at consistently making monthly payments.
- Your bank balances: It doesn’t matter if you have a hefty sum invested in the bank or if you have a bank account that hovers just above $0. This isn’t a factor in your credit score.
- Carrying a balance: There is no benefit to carrying a balance on your credit cards, even though some people think they need to carry a balance to get a good credit score. In fact, if you carry too high of a balance, it could hurt your score by adversely affecting your credit utilization ratio. You can still earn a perfectly good credit score even if you pay off your credit cards in full every month, provided that your payment history is reported to the credit reporting agencies.
Bottom Line: Know What Affects Credit Scores to Improve Your Creditworthiness
As you can see, there are many factors within your control that directly affect your credit score. If you want good credit, you have to pay your bills on time, not get too deeply into debt, have a mix of different kinds of loans, and generally be a responsible borrower. If you can do that, you should be in good shape and have a credit score that helps you out in financial transactions.
If you’re unsure of your credit score, you can run your free credit report once from each of the major credit bureaus every year. Take a look at your report, check it for any errors, and identify what areas you need to improve to boost your score.