Your credit score plays a vital role in your financial life. It impacts everything from loan interest rates to rental applications and even employment decisions. That’s why it’s so important to understand the key factors that make up your score.
In this comprehensive guide, we’ll explore the 5 main factors that determine your credit score, how they’re calculated, and simple tips to start improving your score. Let’s dive in!
1. Payment History
Your payment history holds the most weight in determining your credit score. It makes up a full 35% of your total score.
This factor examines whether you pay your bills on time, including:
- Credit cards
- Auto loans
- Mortgages
- Personal loans
- Utility bills
| Payment Status | Impact on Credit Score |
|---|---|
| On-time payments | Helps increase score |
| 30-day late payments | Hurts score significantly |
| 60-90+ day late payments | Damages score further |
| Collections | Severely damages score |
As you can see above, a strong history of on-time payments helps boost your score. Just one 30-day late payment can begin dragging your score down.
Here are 3 simple tips to build a strong payment history:
- Set payment reminders: Set calendar reminders for bill due dates so you never miss payments. Many banks also allow you to set automatic payments directly from your checking account.
- Pay down balances: Keep credit card balances low to avoid high utilization ratios that make on-time payments harder.
- Dispute errors: If a late payment appears by mistake, dispute the error with the credit bureau.
By diligently monitoring payment dates and disputing errors, you can build a stellar on-time payment record.
2. Credit Utilization
Your credit utilization ratio accounts for 30% of your credit score calculation. This ratio compares your total outstanding revolving debt to your total available credit.
For example, if you have $5,000 in credit card balances and $20,000 in total credit limits across all cards, your credit utilization ratio is 25% ($5,000/$20,000).
General recommendations for healthy credit utilization:
| Utilization Range | Impact on Credit Score |
|---|---|
| Below 30% | Helps raise score |
| 31-50% | Score starts decreasing |
| Above 50% | Hurts score significantly |
To keep your utilization low, here are 3 key strategies:
- Pay down balances: Pay more than the minimum each month to owe less overall. Consider consolidating high-interest debt.
- Request higher limits: Ask issuers to increase your credit limits without performing a hard pull on your credit.
- Use cards minimally: Put everyday spending on a debit card and use credit cards sparingly to avoid high balances.
Monitoring your utilization closely prevents your ratio from creeping too high. Keeping it below 30% can give your score a healthy boost.
3. Credit History Length
The average age of your credit accounts makes up 15% of your overall credit score. This factor mainly examines two components:
- How long your credit accounts have been open
- Time since most recent account opening
Long-standing accounts indicate you can use credit responsibly over extended periods. Recently opened accounts temporarily lower your average account age, although the impact lessens over time.
Here are 4 tips to build a strong history:
- Keep old accounts open: Avoid closing your oldest credit card accounts that demonstrate long, responsible usage.
- Space applications out: Allow at least 6 months between new credit card applications to limit score impact.
- Prioritize history: When consolidating debt, transfer balances to old accounts first to keep history intact.
- Explain credit gaps: If you have gaps in recent history due to financial issues, add explanations in credit report disputes to provide context.
Letting your longest-open accounts age while limiting new applications can strengthen this factor over time.
4. Credit Mix
Lenders like to see you can handle different types of credit, not just credit cards. Your credit mix makes up 10% of your overall score.
This factor examines if you have experience with loans like:
- Mortgages
- Auto loans
- Student loans
- Personal loans
Here’s how different credit mix scenarios generally impact your score:
| Credit Mix | Potential Impact |
|---|---|
| Variety of credit types | Helps increase score |
| Only credit cards | Limits score improvement opportunities |
| Only 1 or 2 loan types | Better than only credit cards, but less mix diversity |
To improve your credit mix:
- Don’t open unnecessary accounts: Only apply for installment loans if you need them to avoid lowering your average account age unnecessarily.
- Consider balance transfers: Transferring credit card balances to a personal loan can improve mix while consolidating debt.
- Leverage existing accounts: Student loans, auto loans and mortgages already improve your credit mix if managed responsibly.
Opening new loans just for mix purposes often does more harm than good. Focus instead on responsibly managing your existing diverse credit.
5. New Credit
The final 10% of your credit score focuses on new credit activity. This includes:
- New credit applications
- Types of credit checks performed
- New accounts opened
Applications for and openings of new credit temporarily ding your credit score a few points but don’t negate positive factors.
Too many new accounts in a short span flags potential risk, so avoid:
- Applying for multiple credit cards at once
- Opening several new loans close together
- Maxing out new accounts quickly
Here are 3 tips for managing new credit impacts:
- Space applications out: Apply for new credit no more than once every 6 months to limit approval declines and score dings.
- Reduce card alternatives: If declined for a new card, avoid immediately applying for multiple other cards.
- Plan large purchases: If you need to open new credit for a large purchase, plan timing wisely around other new accounts.
Carefully timing new applications and accounts prevents opening too much new credit at once so your score can rebound quicker.
Key Takeaways to Improve Your Credit Score
As you can see, your credit score takes many factors into account beyond just making payments on time. Here are 5 key strategies to start improving your score:
- Pay all bills early or on time, every time. Set payment reminders if needed.
- Keep credit card balances low, ideally under 30% of your limit. Pay more than minimums each month.
- Be selective about opening new accounts so you don’t lower your average account age too frequently.
- Manage a healthy credit mix using existing loans and cards rather than opening unnecessary new accounts.
- Review disputes carefully and address errors or add explanations promptly.
Improving your credit score takes diligence across factors, but it opens doors for better loan rates that save you money. Monitor your detailed credit report regularly for early warning signs of potential issues.
Address errors right away. Set goals based on your unique situation to boost your score over time. Reach out for help creating your personalized credit improvement plan.
