What Factors Affect Your Credit Score?

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.

The Major Factors

These major factors determine your credit score under the VantageScore 3.0 model. Each of these factors has varying importance on the final number:

  • Payment History: high impact
  • Outstanding Debt: high impact
  • Derogatory Marks: high impact
  • Credit Age: medium impact
  • Credit Mix: low impact
  • Credit Inquiries: low impact

Payment History

The most significant factor affecting your VantageScore is your payment history. It accounts for a large percentage of your score and reflects whether or not 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:

  • Credit Cards
  • Student Loans
  • Personal Loans
  • Car Loans
  • Mortgage Payments

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.

Outstanding Debt

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 carrying little debt is considered a lower risk borrow, while people who frequently owe high amounts of money are considered a higher risk. 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 takes both the utilization of individual accounts and total utilization across all of your accounts into consideration.

For example, if you only have one credit card with a $1,000 credit limit and have a $100 balance on that card, 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.

Derogatory Marks

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 application for credit. It’s best to try to avoid any derogatory marks on your credit report.

Credit Age

The age of your credit accounts is a combination of 2 different factors:

  • The age of your oldest credit account, and
  • The average age of your combined accounts, which is calculated by adding the age of each account and dividing it by the total amount of accounts you currently have.

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.

Credit Mix

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.

Credit Inquiries

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 occurs 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.

Other Factors

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:

  • Errors: About 40 million Americans have errors on their credit report, and those errors can have a significant impact on your score. Errors can be caused by several different factors such as data entry errors, fraud, and miscommunications.

    While there’s no way to prevent these errors from happening, using a credit monitoring product like ScoreSense can make it easy to monitor your credit and identify incorrect information.
  • Collections: If you leave a bill unpaid for long enough, the issuer will likely send your account to collections. In some cases, often with utility phone or cable bills, the issuer will first sell your debt to a third-party debt collector. Examples of accounts that can end up in collections include:

    • Unpaid Parking and Traffic Tickets
    • Utility Bills
    • Cell Phone Bills
    • Bank overdraft Fees
    • Gym Memberships
    • Child Support
  • Medical Bills: While your medical bills can be sent to collects and impact your credit score if left unpaid, they’re handled a bit differently than other types of debt. Some of the credit scoring models don’t actually take medical debt into consideration at all, and medical debt isn’t reported at all until 180 days after it’s been incurred.
  • Closing Accounts: If you’ve paid off a loan in full, you could see your credit score change. This goes back to a mix of different account types making up 10% of your credit score. Even if you paid every single installment on time, you may see your score decrease, especially if it was the only loan you had.
  • Missing Rent Payments: In many cases, rent payments don’t have any effect on your credit score. But in some versions of your credit report, your rental history may be included – and landlords can report your payment history to the credit bureaus if they so choose. Of course, this can work to your advantage if you regularly pay on time and your landlord reports that positive history. Landlords also tend to pull a specialized version of your credit report when you first apply for a new lease, which could include your past rental information.

    It’s important to note that even if your landlord doesn’t report payment history directly to the credit bureaus, they can still send unpaid debts to collections, which can then affect your credit.
  • Not Paying Your Taxes: If you fail to pay the taxes you owe to the U.S. government, they may file a notice of federal tax lien. These lines can have a serious impact on your credit score. Even if you can’t pay the taxes you owe in full, you can set up a payment plan with the IRS to make installment payments and avoid the lien.
  • Defaulting on Accounts: Foreclosures, repossessions, bankruptcy, and settled accounts are negative remarks that can remain on your credit report for up to seven years to ten years in the case of some bankruptcies.

What Doesn’t Affect Your 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:

  • Income and Assets
  • Bank Account Balance
  • Employment Status
  • Debit Card Use
  • Home Address
  • Age
  • Marital Status

Bottom Line

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.

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