Factors that affect your credit score include your payment history, your credit mix, your credit utilization ratio, the length of your credit history, and whether you've recently applied for new credit. The amounts owed (your debt level), your payment history, and the length of your credit history combined comprise 80% of your credit score.
Your credit report and credit score provide a snapshot for prospective lenders, landlords, and employers of how you handle credit. They use this information to assess your risk to make lending decisions. So if you know what affects your credit score, you can take steps to improve it and improve your chances of getting approved for loans.
Key Takeaways
- Credit scores are affected by your payment history, your credit utilization ratio, the length of your payment history, your credit mix, and whether you've applied for new credit.
- Lenders use your credit score to determine your creditworthiness when they decide whether to approve you for a loan.
- Normal activity in a checking account, such as deposits and withdrawals, does not affect your credit score.
- If the information that affects your credit score is inaccurate, you can file a dispute with the credit bureaus.
Your credit score is affected by how often you make on-time payments, your debt utilization ratio, your credit mix, the length of your credit history and whether you've recently applied for new credit.
Credit bureaus use the information on your credit report to assign you a three-digit score, known as your credit score. If you do not pay your creditors, pay them late, or max out your credit cards, your credit score will be negatively affected.
Payment History
If you have a history of late payments, it will negatively impact your credit score. The more late payments you've had, and the later the payments were made, the lower your score will be. Your payment history accounts for 35% of your FICO credit score.
Usually, credit bureaus report your late payments in terms of timeframes depending on how late you made the payment. Late payments usually won't show up on your credit report until after you are more than 30 days late. When payments are more than six months late, a company may turn over the debt to a collections company.
Credit Use
Your credit utilization ratio or credit utilization rate measures how much of your debt you have used compared to your available debt. The lower the ratio, the higher your credit score. This accounts for roughly 30% of your overall credit score.
Most financial experts recommend keeping your credit utilization rate below 30% to 40%. High utilization rates are a significant indicator of credit risk. However not using your credit at all can have a small negative impact on your credit because creditors won't have information on how you use your credit.
You can reduce your utilization ratio by increasing your payments to pay down your debt and by avoiding spending too much. Plan your payments into your budget to strategically pare down your credit utilization ratio.
Note
Some lenders automatically provide a credit limit increase if you prove to be a responsible (and profitable) borrower. An extended or new line of credit can also increase your credit utilization ratio.
Length of Credit History
The length of your credit history, which accounts for 15% of your credit score, is how long you have had credit. If you have no credit history, it negatively affects your credit score. Lenders are less likely to approve you for a loan because you have not proven you can handle credit responsibly.
You can start to build credit using a secured credit card, which uses a deposit as a line of credit. Then, once you have established that you make the minimum payment reliably, you can apply for a traditional credit card.
If you have paid off a credit card, consider keeping it open instead of closing it. If you close it, you could reduce the length of your credit history, which negatively impacts your credit score, although only slightly.
Credit Mix
Your credit mix is the amount of different types of loans and debt you have, including installment loans like personal loans and mortgages and revolving credit like credit card accounts. It accounts for 10% of your credit score.
When you have a variety of different debt, it can positively affect your credit score because lenders see you can manage different kinds of debt.
If you are lacking in a certain type of credit, avoid applying for it simply to improve your credit mix to get a higher credit score. The improvement to your credit score would likely be negligible. In fact, opening new accounts can have a temporary negative impact on your credit score.
New Credit Applications
When you open a new credit account, your credit score could take a hit. The more lines of new credit you try to open in a short period of time, the more your credit score will be negatively affected. New credit accounts for 10% of your credit score.
Checking Accounts and Credit Scores
Your checking account usually has no impact on your credit score. Normal day-to-day use of your checking account, such as making deposits, writing checks, withdrawing funds, or transferring money to other accounts, does not appear on your credit report. Your credit report only includes money you owe or have owed.
An overdraft won't affect your credit score as long as you take care of the problem quickly. If you don't repay an overdraft and it goes to collections, it can negatively affect your credit score.
Fixing Credit Report Errors
Credit reports are monitored by the three major credit bureaus under the authority of the Federal Trade Commission. Sometimes these bureaus report false information as a result of a clerical error, erroneous information from credit lenders, or even fraud. If there is an error on your credit report, you can file a dispute with the credit bureaus.
Note
If you need help repairing your credit report, consider consulting a credit repair company.
Once an error has been disputed with the credit bureaus and an investigation has begun, the dispute is either accepted or rejected. If the dispute is accepted, the error is generally removed from the credit report, and any negative impact on the credit score is reversed.
Monitor your credit report regularly so that any fraudulent errors can be addressed quickly. If you need any additional help, consider looking into one of the best credit monitoring services.
How Does a Bankruptcy Affect Your Credit Score?
A bankruptcy will have a significant negative impact on your credit score and is likely to stay on your credit report for seven to 10 years, depending on the type of bankruptcy. It will be more difficult to get credit after a bankruptcy, but not impossible.
How Do You Raise Your Credit Score Quickly?
To raise your credit score quickly, you can first check your credit report to ensure there are no errors weighing on your score. Correcting those errors can raise your credit report quickly. You can also enroll in a service that includes other payment history like your utilities bills and rent payments in your credit score, such as Experian Boost.
What Is a Good Credit Utilization Ratio?
Most financial experts recommend trying to keep your credit utilization ratio below 30%, although there is no guarantee how a credit bureau will interpret your credit utilization ratio when it calculates your credit score. In general, your credit utilization accounts for about 30% of your credit score.
The Bottom Line
Many factors play a role in determining your credit score, including how you've paid your bills and the amount of debt you have, among others. Understanding how your credit score is calculated will help you make better financial decisions that can improve your score, and potentially open more opportunities for you as you can qualify for more loans and better terms.
