What Factors Affect Your Credit Score
When you apply for a loan or a line of credit, your lender will use your credit score to determine if your financial history suggests that you are eligible for additional credit. A high credit score allows your lender to offer more flexible terms and lower interest rates, as they will be more certain that you will repay the loan or credit line in full. But how is your credit score actually calculated?
Factors that Build Your FICO Credit Score
Most lenders use a version of the FICO Credit Score, with different types of loans (such as auto loans, home mortgages, and lines of credit) using different variants of this main score. The FICO credit score takes five factors into account:
- Credit History: 35%
- Credit Utilization Rate: 30%
- Length of Credit History: 15%
- Credit Mix: 10%
- New Credit: 10%
We provide strategic ways to improve your score by addressing each factor below, but be sure not to neglect any one strategy when working to improve your credit score, as they all contribute to your score.
Credit Score Factor #1: Credit History
Your credit history builds up to 35% of your credit score: over the past seven years, how often did you make your loan or credit payments on time? In addition, foreclosures, bankruptcies, or liens can count against your credit history.
How to Improve Your Credit History
Make a commitment to paying your credit and loan payments in full and on time. Budgeting will help you get there, but automating your payments and consolidating your debts to a single line of credit can make your credit history much easier to manage. You should also request a free copy of your credit report and review it for any errors. Reporting an error on this report can immediately improve your score.
Credit Score Factor #2: Credit Utilization Rate
Thirty percent of your credit score comes from your Credit Utilization Rate, which is the amount of debt you owe divided by the amount of loans and credit that lenders have extended to you. If your credit card has a credit limit of $1000 and you currently owe $200 on the card, your utilization rate will be 20%. Lower Credit Utilization Rates drive high credit scores.
How to Improve Your Credit Utilization Rate
To improve your Credit Utilization Rate, you can attack the problem at two ends. First, pay down your debts — even beyond your minimum payments — to reduce the amount you owe. Second, ask your credit card company if you can raise the limit of your current credit cards: by increasing the amount of credit you are offered, you reduce your Credit Utilization Rate, which drives your credit score higher.
Credit Score Factor #3: Length of Credit History
Every year that you have open lines of credit adds to your credit score — more so when you can show a history of on-time payments. Multiple lines of credit count as separate credit history lengths and can also drive up your credit score. Your length of credit history provides up to 15% of your credit score.
How to Improve Your Length of Credit History
The best time to add a line of credit is yesterday, but today will do. You should only open new lines of credit when you can afford to pay any debt on those credit lines: but if you are confident that you can, opening a new line of credit today adds the additional credit history length that will improve your score tomorrow.
Credit Score Factor #4: Credit Mix
How diverse are your lines of credit? Aside from your credit cards, do you have retail credit cards? Do you have an open auto loan or home mortgage? A healthy mix of credit across different types of your expenses demonstrates a mature approach to financing and gives your new lenders less to worry about. This factor builds up to 10% of your credit score.
How to Improve Your Credit Mix
Adding a new line of credit that you can pay off in full and on time is the best way to add diversity to your financial profile. Provided that you can stay within your budget, credit lines that can be reliably paid off always contribute to higher credit scores.
Credit Score Factor #5: New Credit
Opening a single new line of credit will likely help you, as it adds to your credit mix, starts to build a new length of credit history, improves your Credit Utilization Rate, and — with on-time payments — builds a strong credit history. But opening multiple lines of credit at once suggests to lenders the type of risky behavior that they would prefer to avoid. A large amount of new credit will adversely contribute up to 10% of your full credit score.
How to Improve Your New Credit
Improving your credit score is more about demonstrating responsibility than opening up multiple lines of credit all at once. So take your time to work through the steps above before you open a new line of credit and take care to manage the current lines of credit that you have to show lenders that you are a safe bet.
Additional Ways to Build Your Credit Score
- Review your credit report and correct any errors.
- Pay your bills on time and over the minimum payment.
- Request an increase to your credit limit on your credit cards.
- Don't close any unused accounts: it is better to have unused credit on your report and an additional line of credit than to remove it from your report.
- Have a family member add you as an authorized user to their account.
- If you drive, open up a gas card and pay it faithfully.
- Arrange with your landlord to have your rent paid online: these services can add your monthly rent payments to your credit report.