5 Factors That May Affect Your Credit Score

Lauren WardUpdated August 25, 2023

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Your credit score can have a major effect on your life, so it may be reassuring to know that there are specific factors that contribute to it and that you have some control over them. Your credit score is calculated based on the data found in your credit report. This information includes your history of borrowing money, like how much you owe on loans and credit cards and how consistently you’ve made your payments over time. But it also includes other factors, each carrying its own weight in your overall score.

What Factors Affect Your Credit Score?

As of 2022, the average American has a credit score of 714. But how was that number arrived at, and, more importantly, how is your own credit score determined? There are five primary credit score factors, each with its own level of significance. According to the Fair Isaac Corporation, which issues FICO® scores (one of the most commonly used personal credit scores), the breakdown for the FICO score is as follows:

Payment history
Debt amounts owed
Length of credit history
New credit/recent inquiries
Credit mix

Here’s an explanation of each one, starting with those that have the largest impact.

Your Payment History - 35%

Your credit score is most affected by how consistently you pay your bills on time. However, not every bill you pay is tracked by the three major credit bureaus (Equifax®, Experian®, and TransUnion®). Instead, credit lines are what are primarily listed on your report and included in calculating your score. These typically include your credit cards, loans, and any lines of credit you might have.Don’t be concerned that you'll see a negative entry just because you were a day late on your credit card payment. Creditors don’t report a late payment until it’s at least 30 days overdue (although you may still accrue late fees before then). If you still don’t make a payment after that period, the creditor can report additional missed payments at the 60, 90, 120, and 150 day marks until you either make the payment or the account is considered a charge-off (meaning that the creditor considers the bill unlikely to be paid).

How Much Debt You Owe - 30%

Another factor that can affect your credit score is your total amount of debt, including the amount you owe across all of your accounts and how many of your accounts have balances. You may appear to be financially overextended if you have multiple credit lines with outstanding charges. Keep in mind that each account is considered individually. Carrying a large balance compared to your available credit line can lower your score. This applies to both credit cards and installment loans. The more you pay down your credit cards and loan balances, the better your score is likely to be.

Length of Your Credit History - 15%

Another factor that can affect your credit score is the length of your credit history. The longer you’ve had an account open, the more of a track record you have to demonstrate your creditworthiness. The age of your oldest and newest accounts are evaluated, as is the overall average age of all your accounts. However, closing a credit card account won’t hurt your score because of the length factor. That data stays on your credit report for 10 years after the account is closed and is still included as part of your account average until it drops off. Your score could drop, though, when you initially close a credit account because your overall available credit will be lower.

New Credit/Recent Inquiries - 10%

Your credit score also takes into account how much new credit and new inquiries from creditors you are accumulating. Opening too many new credit accounts in a short period of time may suggest that you’re facing financial hardships. Whenever a creditor performs a hard pull on your credit report, you could see a small dip in your credit score. Each inquiry stays on your report for two years, but only affects your score for the first year. Different types of inquiries vary in their impact on your score. Multiple credit card applications hurt your score more because lenders associate them with greater risk. But multiple inquiries in a short period of time for things like a mortgage or auto loan are typically viewed as rate shopping and won’t dramatically affect your score. You can try to maintain a good credit score by strategically applying for new credit and paying attention to the timing of your applications.

Your Credit Mix - 10%

Your credit mix consists of all the different types of debt you have, though they’re not all weighted equally when your credit score is calculated. It’s typically best to have a mix of revolving credit and installment loans. Revolving credit is more flexible and includes things like credit cards, a home equity line of credit, and store credit cards. An installment account has a fixed monthly payment, such as a mortgage, auto loan, or student loan. This category doesn’t weigh as heavily as your payment history and amounts owed, but having experience with a diverse range of credit types can help build your score.

What Hurts Credit the Most?

Some of these credit score factors weigh more heavily than others. Late payments can cause a major drop, especially if you end up defaulting on your loans or credit cards.These entries stay on your credit report for seven years. Even though the effect on your score lessens over time, lenders can still see that negative history, making it important for you to stay on top of your monthly payments. If you’re unsure of how to improve a bad credit score, consider credit score monitoring. Not only can you get an idea of where your current score stands, but you can also receive actionable tips about how to build your score based on your own history. Recommended: 9 Reasons Your Credit Score May Drop

What Helps Credit the Most?

The best thing you can do for your credit score is to pay your bills on time. This accounts for 35 percent of your credit score, making it the biggest contributing factor. Also try to keep your credit card and loan balances as low as possible, since maxing out your accounts also has a major impact. Another tip is to diversify your credit mix. Installment loans like student loans and mortgages, for instance, are counted more favorably than credit card debt. While you shouldn’t take out a loan just for the sake of your credit score, consider the impact when weighing multiple financing options or investigating a personal loan.

Does Personal Credit Impact Business Loan Applications?

If you’re a business owner, the importance of your credit score doesn’t just affect your personal life, but your business one, as well. Your individual credit score is often used in conjunction with your business credit score when you’re applying for financing. It can be especially important when your business is new and doesn’t have a substantial credit history.Startup business loans with bad credit and no collateral usually include things like credit cards, invoice factoring, and merchant cash advances. Oftentimes, you’ll encounter high fees and interest rates, but you may qualify for better terms if you have a good personal credit score. An unsecured business line of credit for startups is another option to consider for financing a new venture. Each lender has its own eligibility requirements, which could include a minimum time in business and specific revenue qualifications. Since it’s hard for many new businesses to meet those requirements, having a good personal credit score lets you pursue other ways to launch your startup, like a personal loan or credit card.

The Takeaway

Understanding what influences your credit score is a good way to start taking control of your finances. Get empowered to make the right decisions about how to manage your money, like prioritizing credit payments and keeping your balances low. When you do need to apply for financing, such as credit cards or small business loans, consider Lantern by SoFi. With just one application, you can compare multiple offers from leading lenders with no obligation.

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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