What Affects Your Credit Scores?

FICO score is an arbitrary number between 300 and 850 that the majority of financial organizations, lenders, employers, and institutions use to determine your creditworthiness. In other words, it’s an attempt to present (in numbers) the likelihood that you’ll pay back the money that you borrowed.

While secured loans ask for collateral (that they can use to reimburse themselves if you fail to pay them back), unsecured lenders usually focus on the credit score. This is an analysis of all your previous financial activity with a focus on five key factors that will determine your financial trustworthiness.

With that in mind and without further ado, here are these five factors, along with the percentage that they contribute to the total score.

Payment History

The first factor that affects your credit score is your credit history. This is the biggest factor and, on its own, it constitutes up to 35% of all your credit score. Simply put, it’s how vigilant you are when it comes to your credit payments.

Your payment history is affected by payments on all your accounts. Paying your credit cards and your mortgage will affect your credit score positively. The most interesting part about this is that it creates a sort of a positive loop. Think about it, paying your mortgage on time will improve your credit score, which will, in turn, improve your mortgage rate.

Now, past delinquencies, bankruptcies, missed payments, lawsuits listed on your credit report, etc., will negatively impact your payment history and credit score.

It’s worth pointing out that the majority of parties interested in your credit history use one of the three credit bureaus to check you out. These three are Equifax, Experian, and TransUnion.

In order to improve your credit history, you need to start making your payments on time, as well as avoid underpayment. The simplest way to handle this is to automate your payments through technology or establish a bill-paying routine.

Amounts Owed

The amount of money that you already owe is the second-biggest credit score factor. According to some estimates, it makes up roughly 30% of your total FICO score. Together with payment history, it constitutes two-thirds of your total credit score, which is why it’s not to be taken lightly.

This factor is somewhat tricky for several reasons. First of all, the amount of money owed, on its own, is not that big of a problem. However, if you’re having too much money borrowed relative to your available credit, this could be a problem. Why? Because it indicates that you’re in a bad financial situation and that you might soon be at risk of defaulting.

It’s also worth pointing out that the report focuses on how much of the installment loan is still owed, not how high was the original loan amount. So, when you decide to stop procrastinating and start doing something about your credit score, this should definitely be your first stop.

Having a line of credit but using a small amount of it (low credit utilization rate) may impact your total credit score positively. In fact, it might be better for your total credit score than not having a line of credit to begin with.

Length of Credit History

The first thing you need to bear in mind is the length of your credit history constitutes 15% of your total credit score. Here, the age of your oldest credit account, the age of your newest credit account, and the average age of all your open credit accounts need to be taken into consideration. Just having these accounts is not enough. The last time they were used will also be taken into consideration.

The length of your credit history is one of the most misunderstood factors. Why is it misunderstood? Well, a lot of people, when they first decide to improve their credit score, start paying off their debt. This results in a blunder where they close their credit card after paying it off. Needless to say, this is a move that shortens your credit history, thus lowering your total credit score.

One of the tricks with establishing a decent credit history is that it’s best to start when you still don’t need a line of credit. Getting credit when you already have a poor credit history is not as easy.

In the end, in order to get a grip on your credit history, it’s essential that you consider and reconsider which of your credit cards are worth keeping after you pay them off.

New Credit

Opening too many new accounts over a brief period of time can reflect negatively on your credit score. So, avoid opening new accounts too rapidly. New credit constitutes 10% of your total credit score.

Every time you apply for new credit, inquiries will remain on your credit score for the next two years. However, it’s important to point out that FICO scores only consider the inquiries that you’ve made in the previous year (last 12 months).

One more thing you need to keep in mind is something that we’ve discussed previously – your length of credit history. A new account will somewhat lower the average age of your credits. Sure, this is not that big of a deal, but a couple of new credits might make a significant dent.

Even a new inquiry may make a slight impact on your credit score. Soft credit pull is ignored entirely, while a hard credit check may somewhat lower your score.

Then again, a new line of credit can help you start from scratch and be vigilant in your payments. It also provides you with a chance to lower your credit utilization, as well as boost your credit mix. Speaking of which.

Credit Mix

Credit mix determines the last 10% of your credit score. It represents the number of credit types that you currently have open. The reason why this is so important is that it gives financial organizations a chance to observe how they act under different circumstances and in different situations.

Two major types of credit accounts are revolving accounts (credit cards, gas station cards, retail cards, etc.) and installment accounts (mortgage, student loan, auto loans, etc.). Having your credit history limited to just one of these account types might not give the best look.

Also, keep in mind that this is just 10% of your total credit score, and it might be the hardest to control. In other words, it’s not worth worrying that much about.

In Conclusion

In the end, it’s always best to look at your credit score as a whole. After all, a new credit line will impact your length of credit history and your credit mix. In other words, these five factors are tightly intertwined. Also, it might be best not to worry about credit scores too much. You make your payments in time, lower the amount of debt owed, keep credit cards open just in check, and only apply for new loans when you need them.