What Affects Your Credit Score?

If you don’t know what affects your credit score, then you could be damaging your financial future without even knowing it. Your credit score is used to determine your eligibility for everything from a cell phone to a home loan. It is also used to assess your insurance premiums, and more and more employers run credit checks before making job offers. Knowing what affects your credit score can help you plan now for the day you actually need to rely upon it.

A credit score, also called a FICO score, is a three digit used number by banks and other institutions to identify your risk for taking on new debt based on your debt history. According to the Federal Trade Commission, the Equal Credit Opportunity Act (ECOA) ensures that factors like race, sex, or religion may not be used in a creditor’s scoring system.  The three major credit reporting agencies - Equifax, Experian and TransUnion - use software created by Fair Isaac Corp to calculate your number, but each agency may give you a different score based on the information they have on your report.

There are five factors that affect your credit score. Those factors are payment history, the amount of outstanding debt you have, how long you’ve maintained credit, recent applications for new credit, and the type of credit you use. Each factor is weighted by importance and affects your credit score differently.

1. Payment History (35%) The most important factor that affects your credit score is your payment history. Paying your bills on time has the most positive impact on your three digit number. Outstanding bills and bankruptcies obviously count strongly against you, and even one late or missed payment can make a difference.  Recent inconsistencies also have more impact than older mistakes.  
2. The Amount of Outstanding Debt You Have (30%) High balances or balances that are close to your credit limit both affect your credit score in a negative way. Whenever possible, keep your credit card balance at least 50% below your credit limit, or pay the card off completely.
3. How Long You’ve Maintained Credit (15%) If you’ve had a credit card or a loan for a period of several years, it indicates stability, which affects your credit score in a positive way. Creditors want to see longevity, and accounts with a long credit history show that you’re established and indicate reliability.
4. Recent Applications for New Credit (10%) Every time you submit an application for credit of any kind, you are establishing an inquiry, which can negatively affect your credit score.  Inquiries made within the last six months are particularly damaging, but a large number of requests for new credit will also have a negative affect on your credit score.
5. The Types of Credit You Use (10%) In addition to your outstanding debt and payment history, your credit assortment will affect your credit score. A variety of credit accounts – like loans, mortgages and credit cards – is generally preferable for a higher score.

 Resources:

Federal Trade Commission