By Jim AkinWhat Affects Your Credit Scores?
Quick Answer
Credit scoring systems comb and analyze credit reports to evaluate how you manage credit. They focus on factors such as your payment history, your total debt, usage of available credit, length of credit history, credit mix and new credit.
Credit scoring systems such as the FICO® Score☉ 8 and VantageScore® analyze credit report information to predict whether you'll pay your debts as agreed. The software essentially uses advanced algorithms to comb your credit history for signs of good (and bad) credit management habits.
The calculations that produce credit scores are closely kept trade secrets, but the underlying factors they consider (as well as how they're weighted) are public knowledge. The following factors and percentage weightings apply to the FICO® Score, which is used by 90% of top lenders.
VantageScore credit score factors differ somewhat, but adopting the habits described below will promote improvement on any credit score derived from credit report data.
Factors That Determine Credit Scores
1. Payment History: 35%
Making debt payments on time every month benefits your credit scores more than any other single factor—and just one payment made 30 days late can do significant harm to your scores. An account sent to collections, a foreclosure or a bankruptcy can have even deeper, longer-lasting consequences. Payment history accounts for about 35% of your FICO® Score.
2. Amounts Owed: 30%
The total amount you've borrowed affects your credit score, as does the portion of your available credit tied up in outstanding balances. Your credit utilization ratio, or rate—the percentage of your total borrowing limit you're using on your credit cards and other revolving-credit accounts—is a significant factor in determining credit scores. It is also one of the factors that's most responsive to your actions. For instance, paying off a high-balance credit card one month can help you see a credit score boost once the payment is reported to the credit bureaus and a new score is calculated.
To calculate your utilization, divide your outstanding balance on each revolving account by its credit limit and multiply by 100 to express the answer as a percentage. Credit scoring systems consider the utilization rate on all accounts individually and on the total of all accounts, as in the following example:
| Credit Limit | Balance | Utilization (Balance/Limit) | |
|---|---|---|---|
| Credit card 1 | $6,500 | $1,600 | 25% |
| Credit card 2 | $4,800 | $1,500 | 31% |
| Credit card 3 | $8,000 | $1,300 | 16% |
| Total: | $19,300 | $4,400 | 23% |
Individuals with the highest credit scores tend to keep their utilization rates below about 10%, and utilization rates of roughly 30% or greater will more negatively impact credit scores. Paying down higher balances can bring relatively quick score improvement, so in this example, focusing on reducing the balance on card 2 could lead to a relatively quick increase in credit scores.
Amounts owed are responsible for about 30% of your FICO® Score.
3. Length of Credit History: 15%
It makes intuitive sense that experience with credit accounts will tend to make you better at managing debt, and that's borne out by statistical analysis. For that reason, all else being equal, the longer your credit history, the higher your credit score will tend to be. The FICO® Score evaluates your experience with credit by measuring the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts.
Note that closing accounts and paying off loans in full caps the payment history for those accounts, but it doesn't immediately cancel out their ages for purposes of calculating length of credit history. Accounts you choose to close in good standing (meaning with no late payments) remain on your credit report for as long as 10 years.
The length of your credit history accounts for about 15% of your FICO® Score.
4. Credit Mix: 10%
The ability to successfully manage multiple debts and different credit types tends to benefit your credit scores. Credit scoring systems favor a mixture of installment debt (such as student loans, mortgages, car loans and personal loans) and revolving accounts (credit cards and lines of credit). Credit mix comprises about 10% of your FICO® Score.
5. New Credit: 10%
It's a statistical fact that new debt raises the odds you'll fall behind on your old debts. Credit scoring systems, therefore, may ding your score a small amount in response to hard inquiries―entries that appear on your credit report when a lender processes a credit application from you. Your credit will usually decrease less than five points for an inquiry, and if you keep up with your bills, your score will typically rebound within a few months.
Hard inquiries are not all treated the same, however. Credit scoring models see rate shopping for the best rates and terms on installment loans such as mortgages, car loans and student loans as positive behavior. In these cases, they lump together hard inquiries on the same type of loan made within a short period of time (two weeks to be safe) and consider them as one inquiry. Note that hard inquiries made in relation to credit card applications don't get this same treatment: Each inquiry is considered separately, and can have a bigger impact if you apply for several cards in a short time span.
New credit is responsible for about 10% of your FICO® Score.
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About the author
Jim Akin
Jim Akin is freelance writer based in Connecticut. With experience as both a journalist and a marketing professional, his most recent focus has been in the area of consumer finance and credit scoring.
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