Understanding the 5 Factors That Influence Your Credit Score
Your credit score can play an important role in your financial life. Lenders may use it when deciding whether to approve you for a credit card, auto loan, mortgage, or other type of financing. It can also influence the interest rates and terms you’re offered. But what actually determines your credit score?
Although credit-scoring formulas can vary, the widely used FICO® scoring model considers five main categories of information from your credit report. Understanding these factors can help you identify where to focus when working to build or maintain a healthy credit score.
Key Takeaways
Payment history has the biggest impact. It accounts for approximately 35% of your FICO® Score, making consistent, on-time payments especially important.
How much revolving credit you use matters, too. Credit utilization accounts for roughly 30% of your score, so carrying high credit card balances relative to your limits can potentially hurt your credit.
Building credit takes time. Factors such as the age of your accounts, your mix of credit, and how frequently you apply for new credit can also influence your score.
Payment History (35%)
Payment history is generally the most influential factor in your FICO® score, accounting for approximately 35%. It reflects how consistently you’ve paid your credit obligations as agreed.
How Payment History Impacts Your Credit Score
Your credit reports may contain information about whether you’ve made payments on time as well as late or missed payments. A history of paying bills on time can help demonstrate to lenders that you’ve reliably managed your financial obligations.
Late payments, particularly those that become 30 days or more past due and are reported to the credit bureaus, can negatively affect your score. The impact can depend on factors such as how late the payment was, how recently it occurred, and your overall credit profile.
More serious negative events, such as accounts sent to collections, foreclosures, and bankruptcies, may also significantly affect your credit.
Tips for Improving Your Payment History
The best place to start is simple: make your payments on time, every time.
Consider setting up automatic payments for at least the minimum amount due on your credit accounts. You can also use calendar reminders or account alerts to help avoid accidentally missing a due date.
If you’ve fallen behind, bringing past-due accounts current and establishing a pattern of on-time payments may help your credit recover over time. If you can’t make a payment, consider contacting the creditor before the due date to ask whether hardship or alternative payment options are available.
Credit Utilization (30%)
Credit utilization generally accounts for about 30% of a FICO® score. It measures how much of your available revolving credit, such as credit card limits, you’re currently using.
For example, if you have a credit card with a $5,000 limit and a $1,500 balance, your utilization on that card would be 30%.
How Credit Utilization Impacts Your Credit Score
Higher utilization can indicate that you’re relying heavily on available credit, which may represent greater risk to lenders. As a result, high balances relative to your credit limits can negatively affect your score.
Lower utilization is generally better for your credit score. You may have heard that you should keep utilization below 30%, but that isn’t a hard cutoff where your score suddenly changes. Generally, the lower your utilization, the better. People with the strongest credit profiles often use a relatively small percentage of their available revolving credit.
Both your utilization on individual accounts and your overall utilization across revolving accounts may matter.
Tips for Improving Your Credit Utilization
Paying down revolving balances can reduce your utilization and potentially help your credit score. You can also consider making payments before your statement closing date so a lower balance may be reported to the credit bureaus.
Avoid unnecessarily closing older credit cards with available credit, as doing so could reduce your total available credit and increase your utilization percentage. However, keeping an account open may not make sense if it has a high annual fee or encourages overspending.
You may also be able to request a credit limit increase. Just remember that a higher limit should not be treated as an invitation to take on additional debt.
Length of Credit History (15%)
The length of your credit history generally makes up about 15% of your credit score. Credit-scoring models may consider the age of your oldest account, the age of your newest account, and the average age of all your accounts.
How Length of Credit History Impacts Your Credit Score
A longer credit history gives lenders and scoring models more information about how you’ve managed credit over time. Generally, having well-established accounts with a positive payment history can benefit your credit profile.
Opening several new accounts can lower the average age of your accounts, which may affect this portion of your score.
The good news is that this factor naturally improves with time as your accounts age, assuming you continue managing them responsibly.
Tips for Improving Your Length of Credit History
There’s no shortcut to creating a lengthy credit history, but you can avoid unnecessarily working against it.
Consider keeping older accounts open when doing so makes financial sense, particularly accounts without annual fees. Think carefully before closing your oldest credit card simply because you don’t use it frequently.
You should also avoid opening accounts you don’t actually need. Allowing existing accounts to age while maintaining responsible credit habits can help strengthen your credit profile over time.
Types of Credit (10%)
Your credit mix generally accounts for approximately 10% of your credit score. This factor considers your experience managing different types of credit.
Credit accounts generally fall into two broad categories:
- Revolving credit includes credit cards and lines of credit, which allow you to borrow repeatedly up to an established limit.
- Installment credit includes accounts such as auto loans, mortgages, personal loans, and student loans, which are typically repaid through scheduled payments over a set period.
How Your Credit Mix Impacts Your Credit Score
Having experience responsibly managing different types of credit can have a positive influence on your score because it demonstrates your ability to handle different kinds of borrowing.
That doesn’t mean you need every type of credit account. Credit mix is a relatively small portion of your score, and taking on unnecessary debt simply to diversify your credit profile generally isn’t worthwhile.
Tips for Improving Your Credit Mix
Focus on managing the accounts you already have responsibly rather than opening new accounts specifically to improve your credit mix.
Over time, your credit profile may naturally become more diverse as your financial needs change. For example, you might have a credit card and later finance a vehicle or obtain a mortgage.
Consistent, responsible management of your existing debt is typically more important than deliberately adding another type of credit.
New Credit (10%)
New credit generally represents approximately 10% of a FICO® score. This category looks at your recent credit activity, including newly opened accounts and applications for credit.
How New Credit Impacts Your Credit Score
When you apply for a new credit account, the lender will typically review your credit report. This can result in a hard inquiry, which may have a small, temporary effect on your credit score.
Opening several accounts within a short period can have a greater impact because multiple new accounts may indicate increased borrowing risk. New accounts can also reduce the average age of your credit history.
However, not every credit check affects your score. Checking your own credit typically results in a soft inquiry, which does not hurt your credit score.
Credit-scoring models may also account for rate shopping. Multiple inquiries for certain types of loans, such as mortgages or auto loans, made within a designated shopping period may be treated as a single inquiry for scoring purposes.
Tips for Managing New Credit
Apply for credit selectively rather than submitting applications simply because you’re eligible for an offer.
Before applying, research the lender’s requirements and consider using prequalification tools when available. Prequalification often uses a soft credit check, although you should verify the lender’s terms before proceeding.
If you’re shopping for an auto loan or mortgage, completing your applications within a relatively short period may also minimize the scoring impact of multiple inquiries.
FAQs
Final Thoughts
Your credit score isn’t determined by one financial decision. It’s the result of several factors that reflect how you’ve managed credit over time. Payment history and credit utilization generally carry the most weight, but the age and variety of your accounts, as well as how frequently you seek new credit, also contribute to your overall score.
If you’re trying to improve your credit, focus on the factors you can control: pay bills on time, work toward reducing revolving balances, avoid applying for unnecessary credit, and give your accounts time to build a positive history. Improving your credit may not happen overnight, but consistent financial habits can help you build a stronger credit profile over time.
