What Affects Your Credit Score

With all the marketing and advertising out there about credit scores and FICO scores, you most likely already know that when you apply for a home mortgage, a student loan, a car loan, or even a credit card, your three-digit credit score is one of the most important considerations used by the lender and creditor. But do you know the nitty gritty details about what affects your credit score? Or if you already have a great score, how to maintain it? In this article we explore the answers to just that.

Payment history (35%)

How it affects : One of the most basic things that affect your credit score is the history of your financial payments. This factor of your credit report makes up about 35% of how your credit score is calculated. The primary reason creditors and lenders view your credit report is to learn about your payment history -- whether you make payments on time, whether you are able to manage your finances responsibly. Making this factor of the most important factors to the creditor when determining whether or not to approve your credit card or loan application.

How to maintain : There is nothing more ideal than to make prompt payments every month. But as everyone does, we make mistakes. Do you have a late payment? Don't worry so much! There is hope -- one late payment is not the end of the world, it's merely a blemish on your credit. The more recent the negative reflection appears, the more your score will be affected by it. So give it some time, continue making on-time payments, and you will see your credit score gradually return to where it was before.

Summary : Payment history makes up roughly 35% of credit score calculations. This is one of the most important factors to creditors and lenders when considering your credit or loan application, so keep up your prompt payments!

Positive Effects : Timely payments, responsible managing of credit

Negative Effects : Late payments, bankruptcies, collections

Outstanding debts and its ratio to credit card limits (30%)

How it affects : Your outstanding debt is the second most important factor of your credit and makes up 30% of how your credit score is calculated. Ideally you want to keep your total debt below 30% of all credit card balances, and to be safe below 25%. For example: If you have one credit cards with a maximum credit availability of $10,000, you can charge up to $3,000 without it affecting your credit score. Other debts including mortgage loans, auto loans, student loans are also considered but have no "maximum balance" restrictions. However keep in mind that too much debt on your credit will negatively affect your score. Unfortunately there is no formula or easy-to-follow equation used to calculate just how much outstanding debt you can have before your credit score is affected.

How to maintain : As mentioned it cannot be determined how much credit exactly you can accrue before your credit score is affected. But you can control how much credit you charge on your credit cards. Try to keep balances below 25% or an absolute maximum of 30% of the allowable credit on each credit card in order to optimize your credit score.

Summary : Outstanding debt is the second most important factor, making up 30% of credit score calculations. This factor is mostly based on the ratio of revolving (e.g. credit card) debt compared to your total available credit. However, other debt factors including mortgages and loans, also play a role in the final score.

Postive Effects : Outstanding debt below 30% of allowable credit balances.

Negative Effects : Excessive debt, debts above 30% of allowable credit balances.

Length of time you've been building credit (15%)

How it affects : Without a sufficient record of your borrowing and payment habits, your credit report and credit score cannot truly be gauged accurately. This factor of the credit report is based on the concept that your past actions will predict your future decisions when it comes to financial responsibilities. Therefore the longer you have owned credit cards and been establishing your credit history, the better your credit score will be, assuming you make timely monthly payments. Remember credit reports can check on activity as well, so don't forget to use your redit at least once in a while -- it doesn't help to open the credit card and never use it. This still does not help establish your credit history because then there is nothing to show you understand how to charge and pay your charges off.

How to maintain : With this factor what matters is opening and maintaining good and responsible use of your available credit. If you are new to credit, remember that it is never good to apply for too much credit at one time. So pace yourself and apply for one credit card periodically. Once you have a few credit cards approved, use your credit responsibly and make timely paments. Over time your credit will build with longer and longer periods of borrowing and payment history.

Summary : In order to obtain an accurate idea of your credit, creditors and lenders alike will want to see a history of timely payments and responsible borrowing patterns. It is important to have credit and use it wisely, while maintaining your good standing.

Positive Effects : Have at least three lines of credit, maintain timely payments, do not close useful credit

Negative Effects : Close credit accounts, open multiple cards simultaneously

New credit patterns (10%)

How it affects : When it comes to new lines of credit or credit cards, a few things affect your credit score including how long it has been since you applied for the credit and how many accounts you have opened recently. It is important not to open multiple credit cards or lines of credit simultaneously -- this always seems a bit fishy to lenders and creditors, especially if the credit cards have been opened recently and have a relatively short payment history.

How to maintain : When opening new lines of credit or applying for new credit cards, try not to apply for more than one at the same time. Try to spread them out with at least a few months between each application. Not only will it seem less strange to lenders but it will also decrease the amount of inquiries done at the same time.

Summary : Prevent harm and negative marks on your credit report by not applying for multiple credit cards at once and maintaining your current credit cards without late payments.

Positive Effects : Vary credit card applications over months at a time.

Negative Effects : Opening more than one card at one time.

Types of credit used (10%)

How it affects : Just like an investment portfolio, it is best when your credit report consists of a diverse range of credit types, such as credit cards, mortgages, auto loans, installments, etc. The total number of accounts and the amount of debt accrued also affects your credit score.

How to maintain : Once you have opened a diverse arrangement of credit types, make sure to keep timely payments in order to optimize the positive benefits of having a diverse credit portfolio.

Summary : It is best for your credit to have a diverse credit portfolio. This gives the lender the opportunity to see your financial responsibility of different types of credit priorities.

Positive Effects : If possible, try to spread out the different types of credit lines. If this is impossible, then keep timely payments with your revolving credit -- this will result in a high credit score.

Negative Effects : There really isn't that m uch harm in having one type of line of credit, as long as you keep timey payments and make the attempt to have more than three lines.

Other miscellaneous factors :

Number of inquiries on your credit report. In order to protect the consumer it has recently become law that as long as inquiries are made for the same pu rpose, multiple inquiries within 30 days from the first inquiry, will only count as one hit on your credit. However, multiple inquiries from different sources will greatly affect your score. For example: Your score will only be affected once if you allow two or three mortgage brokers to pull your credit within a 30 day window. However, if you apply for a home mortgage, an auto loan, and a couple credit cards within 30 days of each other, each type of inquiry will count separately and it will do dramatic damage to your credit score.

We hope that our tips and suggestions help you better understand how credit scores are affected by every day situations and decisions. You can also read more helpful articles regarding credit, how to improve your score, and more on the Credit page of the Library.