It’s no secret that your credit score is an important number. And while most people have a general understanding of what the number represents and how to use credit responsibly, not everyone is as aware of exactly what individual factors affect that score.
When it comes down to it, there are a lot of different factors affecting your score. The five major factors are your payment history, credit utilization ratio, age of credit accounts, a mix of credit accounts, and hard inquiries. These, along with some less commonly known elements, are what make up your credit score.
These major factors determine your credit score under the VantageScore 3.0 model. Each of these factors has varying importance on the final number:
The most significant factor affecting your VantageScore is your payment history. It accounts for a large portion of your score and reflects whether you pay your bills on time.
Creditors typically report your payment activity, both good and bad, to the credit bureaus every 30 days. Types of accounts that are reported include:
Other bills, like your electricity, phone, and cable payments, won’t impact your score unless your account is sent to collections.
Even a single late payment can make an impact, so it’s important to pay every bill on time.
Your outstanding debt is the total amount of money you owe lenders at any given time. Lenders use outstanding debt to identify whether or not you’re a high-risk borrower. Someone with little debt is considered a lower-risk borrower, while someone who frequently owes large amounts of money is considered a higher-risk borrower. As a result, lower credit balances are usually better for your credit score.
Credit utilization is how much of your available credit you’ve used up in a month. It’s calculated by dividing the total revolving credit you are currently using by the total credit limit of all your revolving accounts. VantageScore 3.0 considers both the utilization of individual accounts and total utilization across all your accounts.
For example, if you have only one credit card with a $1,000 credit limit and a $100 balance, your utilization ratio would be 10%.
As a guideline, it’s best to keep your credit utilization to a max of 30%, but under 10% is ideal.
Any derogatory marks on your credit report include details of bills that have been sent to collections, as well as any tax liens, bankruptcies, and civil judgments you have on your report. If you have items like this on your credit report, lenders may assume it’s risky to lend you money. To mitigate the risk, they may charge you a higher interest rate or simply deny your credit application. It’s best to try to avoid any derogatory marks on your credit report.
The age of your credit accounts is a combination of 2 different factors:
The older your accounts are, the better your score will be because it shows lenders that you have experience handling credit. So don’t close your oldest accounts unless you absolutely need to and avoid opening too many new accounts at one time.
The types and the total number of accounts you have also influence your score. When it comes to your credit score, it’s best to have a mix of both revolving debts, like credit cards, and installment debts like car loans and personal loans. Having a less diverse credit portfolio won’t necessarily lower your total score, but lenders want to know that you have experience handling different types of debt and can handle them responsibly.
There are two different types of inquiries that lenders can make on your credit report. Soft inquiries are what companies use to determine whether or not you’re prequalified for a credit or loan offer, and what you do when you check your own credit score – these don’t show up on your credit report.
But hard inquiries, which are what occur when you apply for a new line of credit, do show up. These affect your score for one year and account for a small percentage of your total score. While hard inquiries are impossible to avoid altogether, if you need a new line of credit, it’s best to keep them to a minimum whenever possible.
While the major factors listed above are the biggest components of what makes up your credit score, there are other elements that can affect it, too.
Here are a few commonly overlooked elements that may be affecting your credit score:
Not every piece of your financial life affects your credit score. The following aspects have no impact on your score, though they could still play a role in whether or not you’re approved for new accounts:
While credit scores might appear to be a complex equation of different factors, they’re easy to understand when you break them down piece by piece. Understanding exactly what affects your score and developing healthy financial habits are the first steps in achieving a high credit score and lifelong financial health.