Understanding Your Credit Score

4 min read

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.


  • 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.

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