Your credit score is determined by several factors that paint a picture of how you’ve managed credit in the past. Understanding what affects your credit score can help you build up your credit, or protect it, so that you can use your score as a tool to help achieve your financial goals.
The two major scoring companies in the United States, FICO® and VantageScore®, slightly differ in how they calculate your score, but they agree on the two factors that are most important: payment history and credit utilization.
Here’s a breakdown of what influences your credit score:
1. Your bill payment history
One of the most important parts of your credit report is your payment history — basically, whether you’ve consistently paid bills and other financial obligations on time. Lenders want to be sure that you will pay back your debt on time when they are considering you for new credit. Your payment history accounts for about 30-40% of your credit score, depending on whether the FICO or VantageScore credit scoring model is used.
2. Your credit utilization
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. In other words, it’s how much you currently owe on credit cards and other lines of credit, divided by your total credit limit. Lenders look to see how much available credit you’re using to get a sense of how reliant you are on credit. General guidance is to aim for a credit utilization ratio at or below 30% — the lower the better — for a better score.
3. Your credit history length
This includes the age of your oldest credit account, the age of your newest credit account, the last time you’ve used each account, and the average age of all your accounts. A longer credit history generally reflects positively on your credit score, however you still need to actively use those accounts for this to have an impact.
4. Types of credit on your report
Having a variety of types of credit accounts, such as a car loan, credit card, student loan, mortgage or other credit products, is generally seen as positive as well. Lenders typically like to see how well you manage a wide range of credit products.
5. Number of credit inquiries
Each time you submit an application that requires a credit check, an inquiry is placed on your credit report. One or two inquiries won’t hurt your credit score too much, but several inquiries in a short period of time can negatively affect your score. The good news is that, in general, credit inquiries have a small impact on your credit score, and for most people one additional credit inquiry will take less than five points off your FICO score. It’s important to note that checking your own credit score is considered a “soft inquiry”, and will not impact your score.
Keep in mind, there are two types of credit inquiries: a hard inquiry (also referred to as a “hard pull”) and a soft inquiry (“soft pull”). A hard inquiry is a credit information request that includes a borrower’s full credit report, typically used for a background check or credit approval. Hard inquiries result in a deduction of points from your credit score, as they usually are linked to an application for new credit. A soft inquiry occurs when you check your own credit report, or give permission to someone like an employer to review your report. They also may occur if a lender or credit card company checks your credit to pre-approve you for offers. Soft inquiries will not affect your credit score.
6. Negative marks on your credit report
Negative marks on your credit – often referred to as “derogatory marks” are items such as collections, bankruptcy and foreclosure. These items will typically stay on your credit report for seven years, and significantly damage your credit.
Common negative marks include:
- Missed payments: If you are over 30 days late to make a payment, you should expect a mark on your credit record. Missed payments typically stay on your credit report for seven years, and the later the payment, the greater the damage to your credit scores.
- Repossession: If you miss payments on an item, such as a car, the lender may physically take it back. A repossession will stay on your credit report for seven years.
- Collections: If a lender does not receive a payment they may send or sell the debt to a debt collection agency. Having an account in collections stays on your credit report for seven years, sometimes even after you have paid it off.
- Bankruptcy: A personal bankruptcy will stay on your credit report for a period of time, depending on the type. A Chapter 7 bankruptcy will stay on your report for ten years, and a Chapter 13 bankruptcy will stay on your report for about seven years.
- Foreclosure: If you fail to make payments on your mortgage and the bank seizes it, a foreclosure will be reported. Foreclosures stay on your credit report for seven years.
While improving your credit score when you have one or more negative marks on your report may seem overwhelming, consistently making payments on-time and paying attention to your credit utilization ratio can make a big difference.