By Jim AkinWhat Affects Your Credit Scores?
Quick Answer
Credit scoring systems 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® ScoreΘ and VantageScore® analyze credit report information to predict whether you'll pay your debts as agreed. Their 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 scoring factors differ somewhat, but adopting the habits described below will promote improvement on any credit score derived from credit report data. Here are the key factors that influence your credit scores, plus steps you can take to improve each factor.
Factors That Determine Credit Scores
1. Payment History: 35%
Payment history has the single biggest impact on your credit, which means paying your bills on time every month is key to building and maintaining good credit. Just one payment made 30 days late or more can do significant harm to your scores, and the negative impact can become more severe the further behind you fall on payments. An account sent to collections, a foreclosure or a bankruptcy can have even deeper, longer-lasting consequences.
Payment history makes up 35% of your FICO® Score.
Key moves to make: Make all your debt payments on time every month. To ensure you don't forget, set up autopay or enable text alerts for payment due dates. If you anticipate struggling to afford your minimum payments, contact your creditors right away to negotiate a hardship plan. If you're already behind on payments, learn about how to bring your accounts current to mitigate the damage. Reach out to a nonprofit credit counselor if you're feeling overwhelmed by payments and need help.
Learn more: How to Improve Your Payment History
2. Amounts Owed: 30%
The total amount you've borrowed affects your credit score, as does the portion of your available credit in use. Your credit utilization ratio or rate, the percentage of your borrowing limit you're using on your credit cards and other revolving credit accounts, is a significant factor in this category.
What credit utilization should you aim for? Those with the highest credit scores tend to have utilization ratios below 10%, but the lower, the better. Broadly speaking, keep your credit utilization ratio below 30% to avoid a more substantial negative impact on your credit scores.
Amounts owed are responsible for 30% of your FICO® Score.
Key moves to make: Paying down installment loans, such as auto loans and personal loans, has a positive impact. If you're carrying high credit card balances, start paying them off to improve your credit utilization ratio. Calculate your current credit utilization ratio using the steps below. Then, aim to bring your utilization below 30%.
To calculate your credit utilization, divide your outstanding balance on each revolving account by its credit limit and multiply by 100 to express the result as a percentage. Credit scoring systems consider the utilization rate on each account 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 credit card utilization | $19,300 | $4,400 | 23% |
Learn more: Which Debts Should I Pay Off First to Improve My Credit?
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 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 15% of your FICO® Score.
Key moves to make: If you don't have any credit accounts, you can start building a credit history by researching credit products well-suited to your needs. For example, you could consider applying for a secured credit card or asking to be added as an authorized user on the credit card of a trusted loved one. If you already have credit cards, keeping them open can help you maintain your credit history. That said, if a card charges annual fees or tempts you to overspend, closing it may be better for your finances overall.
Learn more: Should You Cancel Your Unused Credit Cards or Keep Them?
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 makes up 10% of your FICO® Score.
Key moves to make: It's a good idea to balance the pros and cons of various credit accounts when you're considering your credit mix. It's typically best to apply for new credit only when you need it, rather than to add a new type of account to improve your credit mix; instead, it may pay off to focus on the higher-impact score factors above. Your credit mix is likely to improve if you use the types of credit you need over time—such as a credit card or a mortgage—and then demonstrate responsible management of these accounts.
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 per 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 10% of your FICO® Score.
Key moves to make: Limit hard inquiries on your credit report by only applying for new credit when you need it. Before you apply for a credit card or loan, get prequalified for a stronger sense of whether you may be able to get approved. When you're shopping for a large loan, such as a mortgage, and need to compare loan terms, take advantage of rate shopping by sticking to a focused 14-day shopping window.
Frequently Asked Questions
The Bottom Line
Understanding the factors that go into credit scores can help you recognize the connections between your behaviors and your scores. While there are factors beyond your control (you can't instantly gain 10 more years of credit management experience, for instance), you can make choices today that affect your credit scores relatively quickly.
Adopting good credit habits that align with credit scoring factors and sticking to them over the long haul is the key to steady credit score improvement. To monitor your progress, you can sign up for free credit monitoring from Experian.
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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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