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The 5 Main Factors That Affect Your Credit Score

By: David Bach  |  Last Updated: October 5, 2020
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLEWhat is a credit score?
What is a good credit score?
What affects my credit score?
Find your credit score and improve it

Your credit score matters. The better your score, the more likely you are to get a good deal on a home or car. It could affect whether or not you can open a credit card — or even how much you’ll pay for car insurance.

Right now, as we’re dealing with the Covid-19 pandemic-induced recession, you may be concerned with how your credit will be impacted — especially if you’re one of the millions of Americans who have lost their jobs or seen reduced hours and are struggling to make ends meet.  

It’ll help to understand what exactly affects your credit score. But first, let’s back up and start with the very basics.

What is a credit score?

Your credit score is a three-digit number that typically ranges from 300 to 850. It’s meant to give lenders (think: banks providing mortgages, credit card companies or car dealerships financing auto purchases) an idea of your ability to handle credit and repay loans. 

A good score means you’re a safe person to lend money to. A bad one means you may be too risky. Lenders use your score to decide whether they should loan you money and, if so, how much interest they should charge you.

There are many types of credit scores. The most widely used rating is the FICO Score, created by the Fair Isaac Corporation, but there’s also VantageScore, which has been gaining market share since the big three credit bureaus (Experian, Equifax and TransUnion) created it in 2006. There may be slight variations between your scores, but they probably won’t be wildly different. In general, if you have a great FICO Score, chances are you’ll also have a great VantageScore — and vice versa.

Your score depends on a variety of factors (we’ll dive into those later on in this article), all of which reflect some aspect of your financial behavior. And, just like your finances, your credit score changes all the time.

What is a good credit score?

Credit score ranges vary depending on the type of model used (FICO or VantageScore). Here are the FICO Score ranges, according to Experian:

300-579: Very Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Exceptional

Here are the VantageScore score ranges, also according to Experian:

300-499: Very Poor
500-600: Poor
601-660: Fair
661-780: Good
781-850: Excellent

An “exceptional” or “excellent” credit score can help you land the best rates from lenders, which could ultimately save you thousands of dollars over the course of your loans. On the other end of the spectrum, if you have a “very poor” credit score, you likely won’t even be approved for credit. If you’re in the “fair” range, you may be approved for credit but not at the most competitive rates.

What affects my credit score?

So how do the credit-rating companies decide what score to assign you? In short, they take your credit history based on your credit reports and run it through a complicated series of calculations. The result is a number somewhere between 300 and 850. 

While the two major scoring companies (FICO and VantageScore) differ a bit in their approaches, there are five main factors that affect your score. FICO spells out exactly how important each factor is on its website by assigning percentages to each category. Here they are, in order of importance:

1. Payment history: 35% of your FICO Score

The first thing any lender wants to know about you is if you’ve paid past credit accounts on time. Do you always pay your bills on time or do you have delinquencies? Simply being timely impacts more than a third of your score!

VantageScore doesn’t give percentages, but says that payment history is “extremely influential.”

2. Amounts owed: 30% of your FICO Score

This category is also known as credit utilization, which is the proportion of your total available credit being used. Most experts agree that a credit utilization of more than 30% will hurt your score. So if your Visa card has a credit limit of, say, $5,000, you’ll want to avoid carrying a balance of more than $1,500 at any one time. 

Again, VantageScore doesn’t provide percentages, but says that credit utilization is “highly influential” when determining your score.

3. Length of credit history: 15% of your FICO Score

In general, a longer credit history will increase your FICO Score. FICO takes into account how long your credit accounts have been established and how long it’s been since you used certain accounts.

This is why you shouldn’t close old accounts you don’t use anymore (unless there’s a good reason to, like an annual fee on a credit card that you never use).

4. New credit inquiries: 10% of your FICO Score

How many accounts have you opened recently? How many recent inquiries have you had by potential lenders? A lot of new activity can appear risky and make the credit-rating agencies nervous, so avoid opening too many accounts too rapidly.

5. Credit mix: 10% of your FICO Score

Finally, FICO considers your mix of credit cards, installment loans, mortgages, retail accounts, etc. A variety is typically a plus, while too much of one type is typically a minus.

Find your credit score and improve it

Now that you understand what goes into your score, it’s time to check yours if you haven’t already and start improving it if it needs work.

Most credit card issuers provide credit scores to their customers for free. Some provide free FICO Scores, while others provide free VantageScores. Log on to your credit card’s site to find yours — if you can’t find it, call the company and ask.

You can also check with your bank or loan company. Your score may be on your bank or loan statement, or you may be able to find it online by logging into your account. Or, you can check your score through free sites like Credit Karma.

Finally, I want you to work on improving your score. Remember, the better your score, the easier it’ll be to get credit and the better the terms of the loan will be. Check out the action plan I developed to get your score up quickly and keep it there.

Check out my top recommendations for credit monitoring companies

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