5 Factors That May Affect Your Credit Score

Lauren WardUpdated May 18, 2021

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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, and the different kinds of data carry different weights, meaning some things affect your credit score more than others.

What Factors Affect Your Credit Score?

As of 2020, the average American has a credit score of 711. 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 (35%)
Debt amounts owed (30%)
Length of credit history (15%)
New credit/recent inquiries (10%)
Credit mix (10%)

Here’s an explanation of each one, starting with those that have the largest impact and running through the rest down through those with less impact.

Your Payment History

Your credit score is most affected by how consistently you pay your bills on time. Not every bill you have to pay is tracked by the three major credit bureaus (Equifax, Experian, and TransUnion). Instead, credit lines are what’s 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 pay or the account is considered a charge-off (meaning that the creditor considers the bill unlikely to be paid).

How Much Debt You Owe

Another factor that can affect your credit score is your total amount of debt. There are a few different ways the amount you owe can affect your credit score. One factor is the amount you owe across all of your accounts. Another factor is how many of your accounts have balances. You may appear to be financially overextended if you have multiple credit lines with outstanding charges. Finally, each account is also 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 card and loan balances, the better your score is likely to be.

The Length of Your Credit History

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 in the short term because of the length factor. That data stays on your credit report for ten years after the account is closed and is still included as part of your account average until it drops off. But your score could drop when you close a credit account because your overall available credit will be lower.

New Credit/Recent Inquiries

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 at some increased risk for defaulting. 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

Taken together, all the types of debt you have combine to make what’s called your credit mix though they’re not all weighted equally when your credit score is calculated. It’s typically better to have multiple types of credit rather than too much of just one type. Revolving credit is more flexible and includes things like credit cards, a home equity line of credit, or 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 improve 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 loan and credit card 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, you can also receive actionable tips about how to improve your score based on your own history. Even basic credit monitoring includes alerting you to changes in your score. There are some free services available that are less comprehensive, or you can compare different providers’ charges for monitoring your credit score.

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. 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.Start up 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 start ups is another option to consider for financing a new venture. But 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 any type of financing, such as refinancing an auto loan, you could get a better offer with an improved credit score. Compare lender options through Lantern to make sure you’re getting a good deal.

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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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