Do you feel like you need an advanced degree to figure out what is affecting your credit score? Good news is you don’t—it can actually be rather simple.
Behind the number itself (credit scores typically range from 300 to 850), there are five main factors used to calculate credit scores. Lenders use those scores to figure out how likely you are to pay back your debt—thus those scores are often the deciding factor in whether you will get a new loan.
As your financial profile changes, so does your score, so knowing what factors and types of accounts affect your credit score gives you the opportunity to improve it over time.
Top 5 Credit Score Factors
While the exact criteria used by each scoring model varies, here are the most common factors that affect your credit scores.
- Payment history. Payment history is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score. Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit. Payment history accounts for 35% of your FICO Score, the credit score used by 90% of top lenders.
- Amounts owed. Your credit usage, particularly as represented by your credit utilization ratio, is the next most important factor in your credit scores. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at how much of your available credit you’re utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors. Credit utilization accounts for 30% of your FICO Score.
- Credit history length. How long you’ve held credit accounts makes up 15% of your FICO Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
- Credit mix. People with top credit scores often carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other credit products. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix accounts for 10% of your FICO Score.
- New credit. The number of credit accounts you’ve recently opened, as well as the number of hard inquiries lenders make when you apply for credit, accounts for 10% of your FICO Score. Too many accounts or inquiries can indicate increased risk, and as such can hurt your credit score.
Types of Accounts That Impact Credit Scores
Typically, credit files contain information about two types of debt: installment loans and revolving credit. Because revolving and installment accounts keep a record of your debt and payment history, they are important for calculating your credit scores.
- 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.
How Does Having Different Accounts Affect My Credit Score?
Credit mix—or the diversity of your credit accounts—is one of the most common factors used to calculate your credit scores. It is also one of the most overlooked by consumers. Maintaining different types of credit accounts, such as a mortgage, personal loan and credit card, shows lenders you can manage different types of debt at the same time. It also helps them get a clearer image of your finances and ability to pay back debt.
While having a less diverse credit portfolio won’t necessarily cause your scores to go down, the more types of credit you have—as long as you make on-time payments—the better. Credit mix accounts for 10% of your FICO Score and could be an influential factor in helping you achieve a top score.
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.