Your credit score is determined by many different factors. Understanding these factors can help give you ways to not only build your score, but to also protect it. Credit scoring companies calculate the score from data in your credit report. However, these companies don’t reveal the exact formula and instead just some basic things that are used to calculate your score. You should care about what impacts your score because your credit is important to other aspects of your life. It can affect whether or not you can rent the apartment you want, how much you’ll be approved for a mortgage, and how much you pay on your car insurance for example.
Factors That Affect Your Score the Most
The two major scoring companies, VantageScore and FICO, have different approaches to your credit score, but they both agree that there are two factors that are the most important.
Payment History – Credit reports reveal your payment history and this is whether or not you have paid your bills and other obligations on time consistently. FICO says that payment history makes up 35% of your score. There aren’t any percentages for VantageScore but it says that payment history is influential. To improve your payment history, you need to pay all your bills on time. Payments that are late by more than 30 days will dent your score. The later you pay the bill, the greater the damage. Set up calendar reminders or autopay so you aren’t missing out on due dates. You may even want to ask your creditors if you can move your due date so the payment aligns with when you get paid and you can make sure you stay on top of it.
Credit Utilization – Credit utilization is the amount of your credit limit that you use. It’s recommended that you don’t use more than 30% of your available credit. Those who have a high credit score tend to use even less than that percentage. In order to keep it low, make sure you set balance alerts or make extra payments throughout the month. The score damage that comes from having high credit utilization can be fixed. Once you pay down your balance, creditors report it so the damage disappears.
Other Factors That Affect Your Score
While payment history and credit utilization are the most important factors, there are still other things you can focus on if you are trying to improve your credit score.
Length of Credit History – The longer you have a credit history, the better, so it’s recommended that you keep your old accounts open unless you have a good reason not to. For example, one reason may be a card you no longer use, but that has an annual fee. If you want to improve on this category, see if you can be added as an authorized user on an old account that also has a great payment record.
Credit Mix – To get a higher credit score, you want to have a mix of installment accounts, as well as credit cards. Installment accounts are those with a set number of payments, such as mortgages and car payments. Revolving credit is usually associated with types of home equity loans and credit cards. With this type of account, you have a credit limit and then you make a minimum payment based on how much you are using. This credit fluctuates and there isn’t a fixed term.
Applying for New Credit – Part of your score is the length of time it has been since you have applied for new credit. Every time you apply for credit, it creates a hard inquiry on your credit and can take some points off your score.
Total Debt and Balances – It helps improve your score if you are making progress paying off any debt and balances you have.
Factors That Don’t Have An Impact on Your Score
Even though there are quite a few factors that impact your score, there are some things you can do that will have no impact on your score.
Checking Your Own Credit Score – If you check your score through a free credit score service or your bank then this doesn’t have any impact on your score. Checking your own score is not considered a hard inquiry and instead is a soft one. You are able to check as much as you want with no impact.
Utility and Rent Payments – In many cases, your utility payments and rent payments aren’t reported to credit bureaus. There are some exceptions. If you are late on a utility payment and the utility company sells it to a collector then that can be reported to the credit bureau and can have an impact on your score.
There are some people who don’t have a credit score. If you are looking to build your score from scratch then there are some things you can do. You can be added as an authorized user or you can open a secured credit card. It’s best to be added as an authorized user for a close family member who already has a great credit history. As long as this primary cardmember is making his or her payments on time, you can benefit from this and it can jump-start your credit. A secured credit card is used the same way as a traditional credit card. However, this one card does require a security deposit that is usually equal to your credit limit. This protects the credit issuer if you default and allows them to take you on as a riskier borrower.