- The Basics of Credit Scores
- The Five Factors That Affect Your Credit Score
- Other Factors That Affect Your Credit Score
- How to Improve Your Credit Score
- The Bottom Line
Your credit score is one of the most important factors in your financial life. It can affect your ability to get a loan, rent an apartment, and even get a job. So what exactly affects your credit score?
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The Basics of Credit Scores
Your credit score is a number that creditors use to determine your creditworthiness. This number is calculated based on your credit history, which is a record of your loan repayments, credit utilization, and other financial factors. A high credit score means you’re a low-risk borrower, which can help you qualify for the best loan terms.
What is a credit score?
A credit score is a statistical number that shows how likely you are to repay debt. It is used by lenders to determine whether or not they should lend you money, and at what interest rate. The higher your credit score, the better your chances of getting approved for a loan and getting a lower interest rate.
There are many factors that go into determining your credit score, but the most important ones are your payment history and the amount of debt you have. Payment history includes things like whether or not you make your payments on time, and if you have any late payments or collections on your record. The amount of debt you have includes the total amount of all your debts, as well as your credit utilization ratio (how much of your available credit you’re using).
Other factors that can affect your credit score include the length of your credit history, the types of credit accounts you have, and whether or not you have any new applications for credit.
If you’re interested in learning more about how credit scores work, you can check out this article from NerdWallet: [What is a Credit Score?](https://www.nerdwallet.com/blog/finance/what-is-a-credit-score/)
How is a credit score calculated?
Most credit scores – including the FICO score and VantageScore 3.0 – are based on information in your credit reports. That information is grouped into five general categories:
Payment history (about 35% of most scores): Do you pay your bills on time? Have you ever missed a payment or declared bankruptcy?
Account types (about 10%): Do you have a mix of different types of accounts, such as revolving credit (e.g., credit cards) and installment loans (e.g., auto loans)?
Credit usage (about 30%): How much of your available credit are you using? Experts recommend using no more than 30% of your total credit limit, and some suggest using 10% or less. The less you borrow relative to your limits, the better.
Credit age (about 15%): How long have you been using credit? A longer credit history can help your score, but even people with short credit histories can get great scores.
Inquiries (about 10%): Have you applied for new credit recently? Too many inquiries can hurt your score.
Remember, these are just the most important factors that go into your score – there are many others that may also be considered by lenders when they review your application for a loan or other type of credit.
The Five Factors That Affect Your Credit Score
Your credit score is a number that potential lenders use to decide whether or not to give you a loan. Insurance companies also use credit scores to determine how much to charge for premiums. When you’re looking to buy a house or a car, your credit score will be one of the first things that a lender looks at. There are five factors that affect your credit score.
One of the most important factors in your credit score is your payment history. This is a record of whether you have made your payments on time, and if not, how late they were. Payment history makes up 35% of your FICO score, so it’s important to keep track of your payments and make sure you are always paying on time. If you have late payments, you can try to negotiate with your creditors to have them removed from your report, but this is not always possible.
Credit utilization is one of the most important factors in your credit score. It refers to the percentage of your available credit that you are using at any given time. For example, if you have a credit limit of $1000 and a balance of $500, your credit utilization is 50%.
Ideally, you want to keep your credit utilization below 30%. This shows lenders that you are a responsible borrower and can manage your debt. If your credit utilization is too high, it can be a red flag for lenders and could lead to a lower credit score.
There are a few things you can do to lower your credit utilization. One is to simply pay down your balances. Another is to request a higher credit limit from your creditors. This will give you more available credit and lower your credit utilization ratio.
If you have a high credit utilization, take steps to reduce it as soon as possible. This will help improve your credit score over time.
Length of Credit History
One of the five factors that affect your credit score is the length of your credit history. This is because creditors want to see a history of how you have managed credit in the past. A longer credit history will generally result in a higher score, while a shorter credit history will generally result in a lower score.
There are two things you can do to improve your length of credit history:
1. Get a secured credit card orbecome an authorized user on someone else’s credit card. This will help to establish a positive payment history and show that you are capable of managing credit responsibly.
2. If you have already established a good payment history, make sure to keep your oldest accounts open and active. This will help to lengthen your average credit history and improve your score.
Types of Credit
There are five main types of credit: revolving, charge card, service, installment, and open-end. The type of credit you have can affect your credit score.
Revolving Credit: This type of credit includes lines of credit and credit cards. With revolving credit, you have a set limit that you can borrow up to, but you can also choose to pay off your balance in full each month or carry a balance from month to month. When lenders look at your credit report, they’ll not only see how much revolving credit you have available to you (your credit limit), but they’ll also see how much of that credit you’re actually using (your current balance). That’s why it’s important to keep your balances low — a high balance relative to your credit limit can hurt your score.
Charge Card: A charge card is similar to a revolving line of credit in that you have a set limit that you can borrow up to, but with a charge card, you’re required to pay off your balance in full each month. Charge cards can also help improve your score because they show lenders that you’re able manage debt responsibly.
Service Credit: This type of credit is for utility bills, cell phone service, and other monthly expenses where there’s no set end date for the debt. As long as you make your payments on time each month and keep your account in good standing, this type of credit can help improve your score.
Installment Credit: Installment loans are loans with a fixed amount that you agree to pay back over a set period of time (usually two years or more). Mortgage loans, student loans, and auto loans are all examples of installment loans. With an installment loan, lenders will look at both your payment history (do you make your payments on time?) and the amount of debt that you’re currently carrying relative to the original loan amount (are you overextending yourself?).
Open-End Credit: Open-endcredit is similar to revolvingcredit in that it hasa setlimitthatyoucanborrowupto;however,withopen-endcredit ,youdon’thavetorepaytheentirebalancerightaway .Homeequitylinesofcreditorpersonalloansareexamplesofopen-endcredit .Theseloans comewithminimumpaymentrequirements ,butyoucandecidetomakelargerpaymentstoclearyourdeborfaster .Open-endcreditalsohasamissedpaymenthistory ,sotimelinessofpaymentsisimportant .
Opening multiple credit lines in a short period of time can lower your credit score.
When you apply for new credit, lenders will check your credit report as part of their decision-making process. Each time this happens, it’s recorded as a “hard inquiry” on your report—and too many hard inquiries can hurt your credit score.
Although multiple inquiries aren’t necessarily bad, you may want to avoid applying for too much new credit at one time. That’s because each hard inquiry can cause a small, temporary drop in your score. And if you’re applying for several lines of credit around the same time, that could add up to a bigger score drop.
Other Factors That Affect Your Credit Score
Your credit score is important. It’s used by lenders to determine whether or not to give you a loan, and if so, at what interest rate. A good credit score can save you a lot of money in the long run. But did you know that there are other factors that affect your credit score? Let’s take a look.
A hard inquiry is when a lender checks your credit report because you’ve applied for credit with them. Hard inquiries can negatively affect your credit score for up to one year, although their impact diminishes over time. If you’re shopping for a big-ticket item like a car or a mortgage, multiple hard inquiries from different lenders within a short period of time can be viewed as rate shopping and only count as one inquiry.
Soft inquiries occur when a company checks your credit as part of a routine background check or in order to preapprove you for an offer of credit. Soft inquiries do not affect your credit score.
Hard inquiries occur when you apply for a new line of credit and the lender requests your credit report from one or more of the credit reporting agencies. Hard inquiries can have a negative impact on your credit score, but only for a short period of time.
In general, it’s best to avoid having too many hard inquiries on your credit report. If you are shopping around for a loan or a new line of credit, try to do so within a short period of time (28-45 days). This will help minimize the number of hard inquiries on your report.
An authorized user is someone who has been given permission to use a credit card by the primary cardholder. The primary cardholder is responsible for the debt on the account, but the authorized user can make purchases and build a credit history. Authorized users are not financially responsible for the debt, but their credit score may be affected if the primary cardholder does not make payments on time or if the account balance is high.
Most lenders do not consider authorized user accounts when calculating a credit score, but some may do so if the account has a history of late payments or high balances. If you are an authorized user on an account that is in good standing, it may help your credit score. If you are an authorized user on an account that is not in good standing, it could hurt your credit score.
If you are thinking about becoming an authorized user on someone else’s credit card, be sure to understand your financial responsibility before doing so.
How to Improve Your Credit Score
Your credit score is important because it is one factor that lenders look at when considering a loan. A higher credit score means you’re a lower-risk borrower, which could lead to a lower interest rate on a loan. There are a few things you can do to improve your credit score.
Pay Your Bills on Time
One of the most important things you can do to improve your credit score is to pay your bills on time. Payment history is one of the biggest factors that goes into calculating your credit score, so it’s important to make sure you’re always paying on time.
If you have a history of late or missed payments, try setting up automatic payments so you know your bills will always be paid on time. You should also make sure you’re aware of when your bills are due so you can plan accordingly and avoid any late fees.
If you have missed any payments in the past, you can try contacting your creditors to see if they’re willing to work with you to make a payment plan or help lower your interest rates. If you have a good payment history with them, they may be willing to help you out.
Keep Your Credit Utilization Low
Your credit utilization ratio—the amount of debt you’re carrying compared to your total credit limit—is one of the most important factors in your FICO® Score. Maintaining a low ratio shows creditors that you’re a responsible borrower, and that you’re not overextending yourself financially.
Ideally, you should keep your credit utilization below 30%. That means if you have a $10,000 credit limit, you shouldn’t carry more than $3,000 in debt at any given time. If possible, it’s even better to keep your balance below 10% of your credit limit. That gives creditors even more confidence that you’re a responsible borrower.
Use a Mix of Credit Types
Using different types of credit can actually help improve your credit score. That’s because it shows that you can handle different types of debt responsibly. So, if you have the opportunity to take out a car loan, a personal loan, or a credit card, don’t be afraid to do so. Just make sure you make your payments on time and keep your balances low.
Don’t Apply for New Credit Too Often
One factor that can drag down your credit score is applying for too much new credit. Every time you apply for a credit card or a loan, the lender will pull your credit report, which counts as an inquiry. Too many inquiries in a short period of time can make you look like a riskier borrower and can hurt your score. So if you’re planning to apply for new credit, try to space out your applications so they don’t all show up on your report at once.
The Bottom Line
Your credit score is determined by many factors, some of which you may not even be aware of. Here’s a look at the five biggest factors that go into your credit score:
Your credit score is important
Your credit score is important because it is one factor that lenders use to determine whether to give you a loan and, if so, at what interest rate. A high credit score means you’re a lower-risk borrower, which could lead to a lower interest rate on a loan. A lower credit score could lead to a higher interest rate and could mean that you won’t be approved for a loan at all.
Credit scores are calculated based on the information in your credit report. That information includes your payment history, the types of credit you have, the length of time your accounts have been open, your credit limits, and any derogatory marks you may have (such as bankruptcies or foreclosures).
You can improve your credit score by following some simple tips
There are a number of things that can affect your credit score, and some may surprise you. Here are a few tips to improve your credit score:
Pay your bills on time – This may seem like an obvious one, but late or missed payments can have a significant impact on your credit score. Set up automatic payments for all of your bills to ensure that you never miss a payment.
Keep balances low on credit cards and other ‘revolving credit’ – Your credit utilization, which is the amount of debt you have compared to your credit limit, makes up 30% of your credit score. By keeping your balances low, you can improve your score.
Avoid opening too many new accounts at once – Every time you open a new account, it results in a hard inquiry on your credit report, which can temporarily hurt your score. Only open new accounts when absolutely necessary.
Don’t close unused cards – Part of your credit score is based on the length of your credit history. Therefore, closing an older account can shorten your history and negatively affect your score. It’s generally best to keep older accounts open even if you don’t use them often.
Check your credit report regularly – You’re entitled to one free report from each of the major credit reporting agencies every 12 months. Check for errors and dispute any negative items that you find.