Understanding Your Credit Score

4 min read
hero-deposits-background

Your credit score is a big factor in determining your interest rate and whether you qualify for a loan. By better understanding the key factors that make up your credit score, you can feel more in control.

What is a FICO score?

Many lenders use your FICO score, or credit score, to determine whether to offer you credit. Your FICO score is calculated by applying a mathematical formula to your credit report data. “FICO” is an acronym for the Fair Isaac Corporation, the company that created the FICO score. 

Your FICO score may also be a big factor in determining your interest rate. Generally, lenders consider people with higher scores to be more desirable borrowers, as they’re typically at a lower risk of defaulting on their loans.

On-time payment history

Your credit report shows your credit and loan balances and your track record for repaying them. Paying on time can help improve your credit score, while just one or two late payments can lower your score. Using automatic bill pay or calendar reminders are easy ways to help you avoid late payments.

Credit card usage

Your credit card usage is represented as a percentage that’s equal to your total credit card balances divided by your total credit card limits.

Example:

  • You have two credit cards with limits of $5,000 and $20,000.

  • The first credit card has a balance of $500, while the second credit card has a balance of $2,000.

  • The credit bureaus calculate your credit card usage:
    ($500+$2,000) / ($5,000+$20,000) = 0.1, or 10%.

Creditors may use this percentage to decide whether to approve or deny a loan or credit card. While low overall credit card usage can help your credit score, it’s important to note that a high balance on any one card may lower your score. You can help this by paying off high balances on cards with a lower credit limit first, or by requesting a credit limit increase from your credit card provider. Keep in mind that to raise your limit, some companies make a hard credit inquiry that may affect your credit score.

Average age of open credit lines

The longer your credit history—and the older your accounts—the better. That’s why it’s a good idea to keep older credit cards open and active. Credit card companies sometimes close inactive accounts after a year. Making purchases with your card every few months will reduce the chance that the account will be closed.

Total accounts

People with more accounts or open lines of credit often have higher credit scores because it shows that lenders are willing to give them credit. Having a good mix of different types of credit helps your credit health as well. That said, it's definitely a balance, so only open accounts you really need.

Hard inquiries

When you apply for a credit card, mortgage, loan, or other credit, a hard credit inquiry appears on your credit report. One hard inquiry usually has little impact on your credit score, often a decrease of 1 to 5 points. Multiple inquiries can add up and have a larger impact.

In contrast, a soft inquiry doesn't affect your credit score. Only you can see it on your credit report. Others, like lenders, can't see it. When you check your rate through LendingClub, we use a soft inquiry. We’ll only do a hard pull of your credit (which could affect your credit score) once your loan is approved.

If your loan application isn’t approved, there’s no need to worry. Being declined doesn't hurt your credit.

Public records

Public records, like judgments, tax liens, or bankruptcies, can appear on your credit report as negative items. These records typically stay on your credit report for seven years. Certain bankruptcy types might remain for 10 years. A negative public record indicates to a lender that you may have mismanaged your credit in the past.

Paying off installment loans

Installment loans include personal loans, auto loans, student loans, or any loan paid over a set period with a set schedule of payments. Unlike balances on credit cards or revolving lines of credit, an installment loan account closes once the debt is paid in full.

While paying off an installment loan is great for your financial health, doing so won’t always increase your credit score—in some cases, your credit score may even temporarily drop. A few reasons for this are:

  • You paid off your only installment loan.

     

    Credit bureaus like to see a mix of different credit types. If you paid off your loan and your only other credit history comes from credit cards, this may lower your score.

  • You have a low number of total accounts.

     

    If you have a small number of accounts, closing one can impact your score.

  • The loan you paid off is one of your older accounts.

     

    If you pay off a long-term loan, like a student loan or mortgage, you lose the history that goes with those accounts when they drop off your credit report, which can reduce the average age of your accounts and may lower your score.

It may be tempting to delay paying off your loan to avoid a possible drop in your score. Keep in mind, though, that making consistent payments on your loan and paying it off on time helps your credit in the long run. Closed accounts in good standing still appear on your credit report for up to 10 years. They no longer count toward credit age or your account mix, but a good payment history is a crucial part of your credit health.

If your credit score drops because you have high balances on your credit cards, a balance transfer loan can be a great solution. Rates for balance transfer loans tend to be lower than other types of personal loans with LendingClub—and most credit cards—and have higher approval odds. When you pay off your credit card balances and add a personal loan to your credit mix, it may help raise your credit score.

Credit score types

Credit scores come in many different types. The score you see when you pull your report or get from a monitoring service may not match the score a financial institution uses to make a lending decision. Visit our blog to learn more about the most common credit scores.

You May Also Like

Related Resource Center
Soft inquiries won’t impact your credit scores, and hard inquiries can hurt your scores slightly. Here's what you need to know.
Oct 9, 2023
6 min read
woman on mobile phone image
Having a money plan in place before you turn in your resignation can make the transition smoother. Learn ways to prepare your finances before you go.
Sep 4, 2023
5 min read
Young man relaxing in an orange hammock by a misty lake holding a cup of coffee, looking at laptop on his lap.
Take control of your money and personal wellbeing with tips to recognize burnout and restore your physical, financial, and emotional health.
Aug 7, 2023
6 min read
Woman in pink blazer sitting on ground with laptop in lap next to young girl looking at documents
With six in 10 U.S. consumers living paycheck to paycheck, could budgeting, saving, debt management, or side income be the antidote?
Jul 25, 2023
5 min read
Paycheck to Paycheck
Your credit score plays a role in nearly every financial move you make. Having a great credit score can save you hundreds (or thousands) of dollars a year through lower interest rates on your credit card accounts, personal loans, moving loans, car loans, or mortgage.
Jul 9, 2023
4 min read
Man in denim button up holding a phone, sitting at table smiling
Related Impact
From groceries and diapers to Halloween costumes for pets, nearly 60% of American consumers prefer to shop online for everyday items that make life more convenient, comfortable, and enjoyable. And with rising prices showing no signs of stopping anytime soon, we’re pleased to introduce StackitTM from LendingClub Bank—a new browser extension that automatically finds and rewards eligible members with coupons and cash back for extra savings at more than 15,000 favorite online retailers.
Nov 13, 2022
2 min read
blog header stackit 765x430 v1-1
Even in today’s low-yield, high-inflation environment, it’s essential to keep a certain amount of money in an easy-to-access checking or savings account for things like daily household and emergency expenses, or to meet short-term financial goals.
Oct 2, 2022
5 min read
LendingClub Rewards Checking Nationally Certified as Trusted, Afforda
Since 2007, LendingClub has been on a mission to deliver a world-class experience to all our members. This month we took a moment to reflect on the more than four million members who have chosen LendingClub as their partner to help them reach their financial goals.
Apr 19, 2022
2 min read
Illustration of large number 4 and letter M made up of colorful, tiny illustrations of ethnically diverse people
In March 2022, we hosted our first quarterly webinar where we celebrated our one-year anniversary as a digital marketplace bank. 
Mar 6, 2022
less than a minute read
Blog-post
LendingClub completed the acquisition of Radius Bank in February 2021. At that time, in addition to the direct-to-consumer deposit business, we inherited a fintech partner program, and several lending businesses. As we reach the one-year anniversary of the acquisition, and in conjunction with the conclusion of a strategic review of our business operations, we have made the decision to discontinue certain businesses that don’t fit our mission.  
Jan 2, 2022
2 min read
Man in blue button up shirt and glasses smiling
Related FAQ's
We offer several ways for you to make your monthly auto loan payment, so you can choose the method that works best for you. A statement will be mailed to you every month that shows the payment amount and due date.
Nov 29, 2023
less than a minute read
LendingClub provides a year-end statement that summarizes your account activity, including how much interest you’ve earned and information regarding Notes tied to loans that have been charged off.
Jun 7, 2023
less than a minute read
After you submit your application, you'll get an email with instructions for confirming your email address.
Jun 7, 2023
less than a minute read
In some cases, we may need to confirm your employment before your application can be finalized. The fastest way to confirm your employment is to provide your work email address.
Jun 7, 2023
less than a minute read
To process your application, we may need to confirm your income matches what was on your application.
Jun 7, 2023
less than a minute read
Related Glossary
{noun} A type of credit that allows the borrower to make charges and payments against a set borrowing limit, paying interest only on outstanding balances.
Sep 6, 2023
4 min read
{noun} The amount of unpaid interest that has accumulated as of a specific date, either on a loan or an interest-bearing account or investment. 
Mar 21, 2023
4 min read
{noun} The total annual cost to borrow money, including fees, expressed as a percentage.
Mar 21, 2023
3 min read
A debt that is written off as a loss because the financial institution or creditor believes it is no longer collectible due to a substantial period of nonpayment.
Feb 7, 2023
3 min read
{noun} An interest rate that remains the same for a set time, usually for the life of the loan.
Feb 4, 2023
3 min read
Change Your Money, Change Your Life
Join our monthly newsletter for tools, tips, and insights to improve your financial health.
  

Any reviews presented are individual experiences and results may vary. Reviews collected and authenticated by Bazaarvoice. All reviews can be accessed at https://www.lendingclub.com/company/reviews

Unless otherwise specified, all credit and deposit products are provided by LendingClub Bank, N.A., Member FDIC, Equal Housing Lender (“LendingClub Bank”), a wholly-owned subsidiary of LendingClub Corporation, NMLS ID 167439. Credit products are subject to credit approval and may be subject to sufficient investor commitment. Credit union membership may be required. Deposit accounts are subject to approval. Deposit products are FDIC-insured up to $250,000 per depositor, per ownership category.

"LendingClub" and the "LC" symbol are trademarks of LendingClub Bank.

© 2024 LendingClub Bank. All rights reserved.