What Affects Your Credit Score? A Must Read Guide

what affects your credit score

There may come a time in your life when you want to buy a house or a new car and the seller will ask for your credit score. Most people can tell you their latest credit score, but they can’t tell you what affects your credit score. 

Are looking to whip your credit into good shape before a major purchase? If so, you’ve come to the right place. 

This article will teach you what affects your credit score. We'll also help you make some changes to achieve a better score and therefore a better interest rate. 

Keep reading to learn more about credit scores and increasing your numbers. 

What Affects Your Credit Score? 

When someone asks what affects your credit score what they usually mean is what negatively affects your credit score. Don’t worry, you don’t need a master's in finance to figure out how your credit score is calculated. 

Your credit score will range from 300 to 850. The higher the number the better the score. While we don’t know the exact method used to calculate your credit score, we do know some information that is important in determining your score. 

If you are looking to improve your credit score now, pay close attention to each of these five deciding factors and look for opportunities where you can improve. 

Your Payment History 

Your payment history plays a critical role in determining your credit score. Even if you only miss one payment or you are late to pay by one day it is still reported to the credit bureau. 

Missed payments and late payments negatively impact your score. 

The later the payment and more payments that you missed decreases your score a little each time. Lenders need to know that they can trust you to repay your loans on time. This will be one of the first things lenders look at before they approve your new loan. 

Your payment history accounts for roughly 35% of your FICO score. FICO is the brand of credit scoring used by most lenders these days. 

So, make your payments on time every month to keep your score looking up. 

Amount of Debt 

Next on the list of things that affect your credit score is the amount of debt you have taken on. Your credit usage is very important to leaders because they want to make sure you can handle more debt. 

If you have a lot of credit card debt outstanding or student loans this negatively impacts your credit score. Lenders take a look at your credit utilization ratio by dividing the total amount of credit you have by how much of that credit is being used. 

This gives lenders a look to see how reliant you are on your current lines of credit. 

Credit utilization accounts for roughly 30% of your FICO score. As a general rule of thumb, you don’t want to become too dependent on credit. Try to keep your balances lower than 30% of the total amount of credit available to you. If you can keep it under 10% that’s even better. 

Following this simple tip will increase your credit score and help you get rid of debt. 

Length of Credit Line 

Next up, a lender will take a look at the length of your credit lines. This means lenders will take a look at the credit accounts you have had to see how long you have had the accounts. 

The relationship length with your accounts is important. Generally speaking the longer you’ve had the account the better. 

To improve your score hold onto cards you’ve had for long periods of time. Avoid applying for every new card that gets sent to you in the mail and try to stick with the same companies for your credit. 

We’ll talk a little later on about how a new credit inquiry affects your credit, so keep reading. 

Your Mix of Credit 

People who have high credit scores also have a good mix of the types of credit accounts they use. You may have a car loan, a student loan, a mortgage, and a credit card, or some other type of credit product. It is a good idea to spread out your credit and create a mix of different types of products. 

Your credit mix accounts for roughly 10% of your overall FICO credit score. Having a diverse portfolio of credit tells lenders how well you manage a portfolio of credit products. 

If you’re trying to improve your credit score, don’t put everything on your credit card. It may be a better idea to take out a personal loan. Even something such as getting a car loan can help diversify your portfolio of credit and raise the credit score of some borrowers. 

New Credit Inquiries 

Lastly, pay attention to how many new inquiries you make and how many credit accounts you’ve opened recently. When you apply for a new line of credit the lender will perform a background check and pull your credit score and this can negatively impact your overall score. 

New accounts with new banks are an indication that you do not have an established relationship yet with that bank. If you just opened up a new credit line be sure to make on-time payments and use the line of credit each month to build up your relationship with the lender. 

Learn how to check your credit score and check it monthly to watch your score increase over time as your relationship deepens. 

The number of new inquiries accounts for about 10% of your overall FICO score. Too many accounts or inquiries can hurt your credit score and reduce your chances of getting approved. 

You Can Increase Your Credit Score 

Increasing your credit score takes hard work and patience but you can do it if you stick with it and check your credit score regularly. Now that you know what affects your credit score you know what to avoid. 

Use these tips to help boost or repair your credit so you can get better rates on large purchases like a car or house in the future. If you enjoyed reading this article on credit score factors, be sure to check out our other articles on frugal finances and investing. 

Now that you know what affects your credit score, you can improve your financial situation by visiting the Loans and Frugal Finances section of the Frugal Finance Blog.

New Frugal Finance Blog Posts & Articles