Your credit score plays a vital role when applying for loans and mortgages. Lenders and creditors use your score to determine your creditworthiness and how much you’ll pay in interest.
Your credit scores are based on information in your credit reports, such as payment history, amounts you owe and how often you’ve been late. Other factors include the length of your credit history, credit utilization and types of accounts you have.
Payment History
Payment history is the single biggest factor that makes up your credit score, accounting for 35% of your FICO score. Lenders want to know whether or not you will pay them back, so it’s crucial that you keep your credit payments on time.
If you have a long, unblemished payment history your credit score will be higher. Lenders are more likely to approve new loans and credit cards to borrowers with an unblemished or near-unblemished payment history.
The information that makes up your payment history comes from the information listed in your credit reports, including how you’ve paid revolving lines of credit (like credit cards), installment loans (like vehicle or personal loan payments) and any kind of retail accounts, like in-store credit or financing that you use to purchase items.
Late payments can damage your credit score, but the exact amount depends on how long you’ve been late, how recently it was and how many late marks you have in total. You may also see your credit score impacted by public records, which could include bankruptcies or collection accounts.
Most late marks disappear from your credit report after a certain period of time, usually seven or 10 years. But you’ll still need to be on top of your bills to avoid future late payments, which is why it’s a good idea to set up autopay or credit card reminders to help ensure that you don’t miss a payment.
Amounts Owed
The amount of debt you owe is the second most important factor in your credit score. It accounts for 30% of your score and takes into account the total balances you owe on all of your accounts, as well as your credit utilization ratio, which is the percentage of your available credit that you are using, generally on revolving accounts like credit cards.
The credit utilization factor reflects how much you are utilizing your available credit, which is calculated by adding up the current balances of all your revolving accounts and dividing that number by the total credit limit for those accounts, excluding the mortgage. Generally, lower credit utilization is better, but it’s important not to close accounts that you no longer use, which can reduce your available credit and decrease your credit score.
The length of your credit history is also a significant factor in your credit score. It helps lenders determine how long you’ve been managing credit accounts, which shows them that you have a consistent track record of paying back debts on time and responsibly managing your finances. Lenders consider borrowers with a longer credit history less risky than those with a shorter credit history, although other factors such as payment history, amounts owed and the type of accounts you have (including installment loans such as auto or student loans and revolving accounts such as credit card accounts) can offset a short credit history.
Length of Credit History
The length of your credit history is one of the factors used to calculate your credit score. Generally speaking, the longer your credit history is, the higher your credit score will be. This is because lenders and credit scoring agencies view people with long histories of responsible credit use as being more reliable in repaying what they owe.
This credit factor accounts for 15% of your FICO score or 21% of your VantageScore. It is the third most important of all scoring factors, behind payment history and credit utilization.
Your credit age is determined by the average of the ages of your oldest and newest credit accounts. Closing old credit accounts and opening new ones will cause your average account age to drop, which can lower your score.
Lenders also look at your overall credit mix when deciding whether to approve you for credit. This can be influenced by the type of credit you have (revolving vs. installment) as well as how many different types of credit you have.
It is important to note that your credit scores are based on information gathered by the three major credit reporting agencies, Experian, TransUnion and Equifax. This information is compiled to provide lenders and creditors with a broad snapshot of your credit history over a set period of time.
New Credit
The percentage of credit that you’re using compared to your total available credit, or credit utilization, makes up about 30% of your score. That’s why it’s important to keep balances low and to maintain a healthy mix of credit card accounts, retail accounts, installment loans (like auto or student loan) and finance company accounts. Creditors want to see that you’re not opening new accounts to take on more debt, and that you can manage the debt you have now.
When you apply for a new credit account, whether it’s a credit card or an auto loan, a lender will do what’s called a “hard inquiry” on your credit report. This can cause a temporary drop in your score. However, if the account is opened and used responsibly, it can help increase your credit score over time.
Other factors that make up your credit score include personal data and public records, such as bankruptcies, suits, liens, foreclosures and judgments. These are typically reported to the three major credit bureaus by creditors, landlords and employers. Also excluded from your credit score are demographic characteristics, such as race or ethnicity, sex, age and marital status, as well as employment information, such as job title, salary and employer. These are generally used by lenders to assess your riskiness as a borrower.