What affects your credit score?
Five main factors that affect your credit score
The actual FICO formula is a closely guarded secret. For example, there is no way to know exactly what combination of information will result in a particular score. But we To do know the information used in the formula and the weight of each category.
Payment history (35%)
This shouldn’t be a surprise. The most important factor in your credit score is your payment history. Lenders want to know that you’re likely to pay your bills on time, so it’s only natural that this is the most important area of interest.
Therefore, the surest way to increase your credit score over time is to pay all your bills on time each month. Conversely, since it’s such an important part of your credit score, just one late payment can have a significant negative impact on your credit that can take time to rebuild.
Types of accounts typically used to collect your payment history data include (but are not necessarily limited to) credit cards, installment loans (like auto loans), and mortgages. If you have other lines of credit, such as a home equity line of credit (HELOC), these are usually included as well. Adverse information such as bankruptcies and legal judgments are also included in the Payment History category.
Amounts due (30%)
The second most important factor in your FICO® score is the amount of money you owe your creditors, which accounts for 30% of your score.
However, this does not necessarily mean that dollar amounts of your debt. This category is more about your credit account balances versus your available credit limits and your loan balances versus their original amounts. This is a concept known as the credit utilization ratio.
For example, if you have a credit card with a limit of $5,000 and you have a balance of $2,000, you are using 40% of your available credit. On the other hand, if you have a balance of $4,000 on a card with a limit of $20,000, you are only using 20% of your credit. This last situation could be considered more favorably in your FICO® score even if the amount you owe is higher.
Experts generally suggest keeping your credit account balances at 30% or less of your available credit, and even lower is better.
Length of credit history (15%)
You do not have need a long and established credit history to have an excellent FICO® score, but this is one of the categories of information that is used in the calculation. Generally speaking, a longer credit history is better than a short one.
Specific time factors include the age of your oldest and newest credit accounts, the average age of all your credit accounts, and how long each of your individual credit accounts have been open.
New credit (10%)
You may have heard that if you apply for new credit, your FICO® score could drop. It’s true, and this category is the reason. Research has shown that asking for too many new lines of credit in a short period of time is an indicator of higher credit risk.
This includes credit applications, as well as newly opened accounts. Of course, a single credit investigation (also known as a credit check) or a new account probably won’t have much of an impact. But if you apply for several new credit accounts at the same time, it could have a significant effect on your credit score.
Composition of credit (10%)
This is a point that many people don’t realize is a data point. The FICO formula takes into account the variety of account types reported on your credit report. In other words, if you have a mortgage, a car loan, and a credit card account, it might be better than having just three credit card accounts.
Fair Isaac, the company behind the FICO® score, said the credit combination category is most important for people who don’t have a ton of information in the other credit scoring categories. For example, if you have a relatively short credit history, a good credit mix could help boost your credit score.
Other factors that can affect your credit score
Beyond the five categories of information mentioned above, there are Nope other information that impacts your FICO credit score.
That said, there is other information that could affect your ability to obtain credit from a lender. For example, mortgage lenders will typically check your employment history to determine your likelihood of repaying your loan, even if this is not reflected in your FICO® score. And, lenders of all kinds are likely to check your income to determine your repayment capacity.
Factors that don’t affect your credit score
It is also important to know what doesn’t affect your credit score. For example, your race, color, religion, gender, national origin, or marital status has absolutely no impact on your score. There’s a common misconception that if you get married, your spouse’s credit rating can hurt yours if they have bad credit, and that’s 100% false.
Additionally, these factors will have no impact on your FICO® score:
- Job title
- How long have you been at your job
- State of residence
- The interest rates you pay on your debt
- Child support obligations
This is not an exhaustive list, and the fact is that unless an item of financial information falls into one of the five categories described previously, it will not impact your FICO credit score. FICO isn’t the only credit scoring model, and other (less used) scoring methodologies may include one or more of these things, but it probably won’t affect your ability to get approved for credit in the real world.