What Affects Your Credit Score?

Whenever you apply for a loan or line of credit, lenders use your credit score to determine whether to approve your request. A strong credit score allows lenders to offer more flexible terms and lower interest rates because they can see that you’re more likely to repay the amount you owe in full. But how is your credit score calculated? And what affects it?

We’ll go over the five factors that impact credit scores so you can take steps to improve your credit today.

What is a credit score?

A credit score is a three-digit number that indicates creditworthiness. The higher a person's credit score, the more likely they will repay a loan on time and in full. Having a low score suggests to lenders that a borrower may have a history of making late payments or not repaying the money they owe.

The most common credit scoring system in the United States is the FICO credit score. Your FICO score is a number between 300 and 850. The higher your number, the better your credit looks to lenders. A score of 700 or above is considered good, and a score of 800 or above is excellent. FICO scores are used by 90% of lenders to make credit decisions.

How your credit score works

Credit scores are calculated using information from your credit report. This information includes things like your payment history, how much debt you have, and whether you've had any recent bankruptcies or foreclosures.

Lenders don't just look at your credit score when you apply for a loan. They also consider things like your employment history, income, and debts. However, your credit score is still an important factor in the loan decision-making process, especially when it comes to traditional financing.

How do I check my credit score?

There are a few ways to check your credit score for free. The first is to review your credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can get these reports once a year for free through AnnualCreditReport.com.

Another way to check your credit score is with a credit monitoring service. These services usually have a free trial period, so you can sign up and check your credit score at no cost. Just be sure to cancel before the trial period ends, or you'll be charged for the service.

Finally, you can check your credit score through some credit card issuers and financial institutions. A free credit score is often part of their credit monitoring services.

Factors that affect your credit score

Pie chart showing factors that affect credit score

So, how do you know what helps (or hurts) your credit score? There are five factors, each one with its own level of impact:

  1. Credit History: 35%
  2. Credit Utilization Ratio: 30%
  3. Length of Credit History: 15%
  4. Credit Mix: 10%
  5. New Credit: 10%

We’ll provide some strategic ways to improve your credit score by addressing each factor, but be sure not to neglect any one strategy when working to improve your credit since they all contribute to your score. You’ll also notice that taking a single action can affect more than one factor in your credit score.

1. Credit history - 35%

Your credit history demonstrates how often you made your loan or credit payments on time over the past seven years. It also lists any recent foreclosures, bankruptcies, or liens – all of which can count against your credit score.

How to improve your credit history

Paying your credit and loan payments in full and on time improves your credit score because it demonstrates behavior that lenders like to see. To make managing your credit history easier, create a monthly budget, automate payments, or consolidate your debts into a single line of credit.

You should also request a free copy of your credit report each year and review it for any errors. Reporting a credit report error can immediately improve your credit score.

2. Credit utilization ratio - 30%

Thirty percent of your credit score comes from your credit utilization ratio, which is the amount of debt you owe divided by the amount of loans and credit that lenders have extended to you.

For example, if your credit card has a credit limit of $1,000 and you currently owe $200, your credit utilization ratio for that card is 20%.

Financial experts typically recommend keeping your credit utilization ratio below 30%, but the lower your credit utilization ratio, the better. In fact, having a credit utilization ratio in the single digits — meaning under 10% — is considered excellent.

How to improve your credit utilization ratio

It’s easy to improve your credit score by keeping your credit utilization ratio low. You can do this in two ways:

  1. Pay down your debts. Avoid maxing out credit cards and try to pay more than the minimum payment amounts to reduce what you owe.
  2. Ask your credit card company if you can raise the limit of your current credit cards. By increasing your amount of credit, you reduce your credit utilization rate.

3. Length of credit history - 15%

You might think that having just one line of credit with a good payment history would give you a higher credit score, but this isn’t necessarily true. Having multiple lines of credit can make you look more attractive to lenders.

Why? Each credit card, loan, and line of credit counts as a separate credit history with its own origination date. Having a longer credit history reflects positively on your credit score – especially if you can show a history of on-time payments.

How to improve your length of credit history

Always use good judgment and only apply for new credit when you can afford to make payments or repay the debt in full. If you’re confident you can afford it, opening a new line of credit today adds the additional credit history length that can improve your score soon.

4. Credit mix - 10%

It’s not just the number, but also the types of credit lines you have open that impact your credit score. This is referred to as your credit mix. Having a healthy credit mix demonstrates a responsible approach to financing.

How to improve your credit mix

Take stock of your outstanding debts. How diverse is your credit? Aside from regular credit cards, do you have any retail credit cards? Personal loans? What about an auto loan or mortgage?

Adding a new type of credit line can be an effective way to diversify your credit history. Just be sure you can manage and repay the debt responsibly, otherwise you could negatively impact your score.

5. New credit - 10%

While opening a new credit line can improve your credit in the long run, how often you open a new account also contributes to your score.

Applying for multiple credit cards or loans in a short time is a red flag to lenders because it suggests risky borrowing behavior they prefer to avoid. Try to space out any credit applications so those new credit lines won’t bring down your score.

How to improve your new credit

Improving your credit score is all about demonstrating responsibility. Rather than open multiple lines of credit at once, it’s better to apply for one at a time, then wait a few months before applying for another.

For example, if you’ve recently been approved for an auto loan, wait until you’ve established several months of good payment history before applying for a credit card. You’ll show responsible behavior to a new lender, which can help them see you as a low-risk borrower.

Other factors that might affect your credit score

Here are some other ways you can build your credit score:

  • Review your credit report and correct any errors.
  • Pay your bills on time and pay more than the minimum payment amounts.
  • Request a credit limit increase on your credit cards.
  • Don't close any unused accounts; it’s better to have unused credit on your report and an additional line of credit than to remove it from your report.
  • If you drive, open a gas card and pay it faithfully.
  • Arrange to pay your rent online through a credit-reporting service.

Does a low credit score always mean bad credit?

Sometimes a low credit score isn’t about bad credit. A low score can also mean a borrower is just starting to build their credit history or hasn’t used credit in a long time. But, since they haven’t yet established a good payment history, their score looks risky to lenders.

If this sounds like your situation, the good news is that on-time payments can make a positive difference in your credit score in a short amount of time.

You don’t need a good credit score at Advance America

At Advance America, we consider factors beyond your credit score when deciding whether to approve your loan application. We look at things like your income, employment history, and current debts, which means that past credit mishaps don’t have to define you.

Applying for one of our personal loans won’t impact your FICO score and could provide you with the money you need as soon as today. Visit us in-store or start your online application now!

About the Author

Bree Ewers has contributed to Advance America since 2023. Writing from her home office in Portland, Oregon, she shares a relatable perspective on the financial triumphs and challenges many readers face.

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