What Affects Your Credit Scores?
Your credit score plays a key role in nearly every aspect of your financial life—from the rates you receive on loans to applying for utility services and cellphone plans. Given how often those numbers will come into play, it is a smart move to aim for the best scores you can.
Credit scores are constantly changing. The key to raising yours (and keeping a good score once you get there) is to understand what affects your credit score.
While the two main credit scoring companies—FICO and VantageScore—don't reveal their secret sauce, they do share the relative importance of different scoring factors.
Both companies’ credit scores depend on the information in your credit reports from Equifax, Experian, or TransUnion. And both scoring models use complex algorithms that rely on interconnected factors.
As a result, the specific impact of something can depend on the type of score (each company makes multiple scoring models), and your unique credit profile. In general, the most important credit scoring factors are:
Your payment history
Consumer credit scores are designed to predict the likelihood that someone will fall behind on a bill in the future. It makes sense that your history of paying bills on time or missing payments is one of the most important factors.
Having a history of on-time payments can help you get an excellent credit score. Missing payments can hurt your score and missing several payments in a row may increase the damage. If you missed a payment or two in the past, get caught up as soon as you can and work to keep paying all your bills on time. Over time, the impact on your score will decrease as you add positive info to your credit reports.
Your credit usage
Your debt—both how much you owe overall and how much you owe on each credit account—is the second biggest factor in your credit scores.
The algorithms look at your revolving credit utilization ratio. This is a comparison of the most recently reported balances and credit limits on revolving credit accounts, such as credit cards and lines of credit.
The less of your available credit you use, the better for your scores. This is because credit scoring models interpret this to mean you’re doing a good job managing your credit by not overspending.
Less important scoring factors
Your payment history and credit usage are generally what affects your credit scores the most. But other factors can still be important:
- The age of your accounts. The age of your oldest accounts, the average age of accounts, and other age-related metrics can also be factors. The older your accounts, the better. However, closed accounts may count toward these metrics. If you close an account that’s in good standing, it will stay on your credit report for up to 10 years.
- Experience with different types of accounts. Managing different types of credit—like a credit card and a loan—can help improve your “credit mix” and may give your score a small boost. Lenders like to see that you can handle multiple types of payments.
- Recent credit applications. A hard inquiry is a record of when a creditor checks your credit report after you applied for credit. New hard inquiries may temporarily cause a small drop in your credit scores. Generally, it is a good idea to only apply for credit when you need it.
What Doesn't Affect Your Credit Scores
Some actions don't impact your credit scores.
Checking your own credit reports.
A record of when you check your credit may be added to your report as a soft inquiry. But unlike hard inquiries, soft inquiries don’t impact your credit scores.
Checking your loan rates.
With some creditors, like LendingClub Bank, checking your loan rate generates a soft credit inquiry, which won’t impact your scores. Though, you’ll need to agree to a hard credit inquiry to complete the application process which may affect your credit score.*
Your personal information.
The beginning of your credit report has a section with personal information, such as your name, Social Security number, date of birth, current address, and previous addresses. None of this impacts your credit scores.
Additionally, credit scores don't consider demographics, like gender, ethnicity, race, religion, immigration status, political affiliations, or marital status. This information also isn’t part of your credit report.
Your employer, income, and net worth.
Your credit report may contain information about your current and previous employers, but it’s not a scoring factor.
Credit scores also don’t consider your income or net worth, and those don’t appear on your credit reports. However, creditors may take this into consideration when you apply for a new account.
Your debt-to-income ratio.
Your debt-to-income (DTI) ratio, a comparison of your monthly income and bills, can be an important factor in lending decisions. A lower DTI may help you get approved with more favorable loan offers. But it doesn’t impact your credit score. However, keep in mind that carrying large debts—or maxing out credit cards—can have a negative impact on your credit scores.
Only accounts reported to the credit bureaus can be added to your credit reports and affect your credit score. These accounts generally fall into three categories:
1. Installment loans
An installment loan is a loan that you repay with regular installments over a predetermined period. Examples of installment loans include:
- Personal loans
- Student loans
- Auto loans
- Credit-builder loans
The number of loans you have, whether you’ve missed payments, the portion of the loan you’ve paid off, and the account’s age can all affect your credit scores.
2. Revolving credit accounts
Revolving credit accounts have a maximum credit line you can borrow against, pay down, and then borrow against again. Common examples include:
- Credit cards
- A personal line of credit
- Home equity lines of credit
Your revolving account payment history and the age of the accounts is important. How much debt you carry compared to the overall credit limit for each account is also a key factor.
3. Collection accounts
If you fall behind on a bill and the debt gets sent or sold to a collection agency, the collection account may also be reported to the bureaus and hurt your credit scores. This can happen even if the original bill or payments weren’t reported.
6 Ways You Can Improve Your Credit Score
Once you understand what affects your credit score, it can be easier to understand what you can do to improve your score.
1. Pay your bills on time.
Showing you can manage credit by making at least your minimum monthly payment on time is one of the best ways to improve your scores. If you think you’re going to have trouble making a payment, reach out to your creditor immediately to ask about assistance or hardship options.
2. Pay down revolving accounts.
Paying down your balance on revolving credit accounts (e.g., credit cards, personal lines of credit, home equity lines of credit), can help lower your credit utilization rate and may quickly improve your credit scores.
Because scoring models look at your credit report, rather than your current balance, you could have a high utilization rate even if you pay your bill in full each month. It may make sense to make payment before your statement period ends to decrease the balance that gets reported to the credit bureaus.
3. Bring past-due accounts current.
If you're behind, paying off the balance or working with the lender to bring your account current could be helpful. Some newer credit scoring models even ignore collection accounts once they’re paid off.
4. Limit how often you apply for new credit.
New accounts can lead to hard inquiries and lower the average age of your accounts. Limiting how often you open accounts may make it easier to get and maintain a good credit score.
If you are looking to take out a loan or open a credit card, look for lenders that let you check your rates and offers with a soft inquiry. This can tell you if you’ll likely get approved, which can help you avoid hard inquiries for declined applications.
5. Don't close unused credit card accounts.
Keeping credit cards open can give you more available credit, which makes it easier to have and maintain a low utilization rate. Of course, there are times when it makes more sense to close credit cards. For example, if you want to avoid an annual fee or tend to overspend, closing a card may be the smarter financial move.
If you're already carrying high-interest credit card balances, consolidating the debt with an installment loan could help you save money and improve your credit score by lowering your utilization rate.
6. Monitor your credit.
It's a misconception that checking your credit reports lowers your scores. Quite the contrary—being aware of your finances and tracking your progress can be beneficial. Additionally, reviewing your credit reports gives you the opportunity to check for errors that may be hurting your credit scores. If you spot one, such as a late payment that you made on time, you can file a dispute with the credit bureau to try and get the error corrected.
What Affects Your Credit Scores FAQs
1. What factors will affect my credit score?
Credit scoring factors are often put into several categories: payment history, credit usage, length of credit history, credit mix, and recent activity. Of these, your payment history is the most important.
2. What has the biggest effect on my credit score?
In general, your payment history and current credit usage are the most important categories. Having a history of making your payments on time and only using a small portion of your available credit are best for your credit scores.
3. What has the biggest effect on the interest rate I can get on a loan?
Your credit score can impact the interest rate you receive on a loan. Additionally, your income, outstanding debt, DTI, how much you’re borrowing, your history with the lender, and the lender’s internal goals could all affect your interest rate.
4. What can decrease my credit score?
Your credit score can drop when credit bureaus receive and add new, negative information to your credit reports. Common examples include information received about late payments, collection accounts, bankruptcy filings, and hard inquiries.
*Checking a rate through us generates a soft credit inquiry on a person’s credit report, which is visible only to that person. A hard credit inquiry, which is visible to that person and others, and which may affect that person’s credit score, only appears on the person’s credit report if and when a loan is issued to the person. Credit eligibility is not guaranteed. APR and other credit terms depend upon credit score and other key financing characteristics, including but not limited to the amount financed, loan term length, and credit usage and history.