What factors impact my credit score?

Matt Bicknell

If you’ve ever had to take out a loan, rent an apartment, buy a car or even open up a cable account, you’ve probably had your credit score pulled and reviewed. If you haven’t had to do any of these yet, brace yourself, as it’s the number one factor that impacts the lender’s decision.

So, how exactly are the credit agencies rating you?

Your credit score reflects the likelihood that you’ll pay back debts based on data in your credit report. To calculate that score, the agencies break down the relevant credit spending activity from your report into five main categories, outlined with weightings below:

1. Payment History (35%)

Naturally, the best indicator that you’ll pay on time in the future is how often you’ve paid on time in the past. Agencies may look as far back as 7 years into your credit report and as few as 2 late payments will negatively impact your score. Setting up scheduled payments for your credit cards is the easiest step to boosting your score, and will also help you manage your debt.

Just one late payment can hurt your credit score significantly and if you let those payments go unpaid for more than 30 days it can be hard to rebuild your credit.

Tip: Turn on autopay and try to always pay the previous statement in full every month. If you can't pay the full balance, at least pay the minimum amount due. 

2. Current Outstanding Debt (30%)

Keep an eye on your outstanding balances relative to the credit limit on each credit card you use. At Birch we recommend keeping your utilization below 30%, as anything beyond may signal a higher risk in not being able to pay higher debts.

When it comes to your credit report, your current outstanding debt is not necessarily recorded on payment due dates, so it’s especially important to keep utilization low through regular payments.

For example, your card issuer may tell you they collect data for your credit report on the 19th every month, but payments are only due on the 1st. This means if you keep a high balance through the month and only pay it off on your due date, you’re losing points on your credit score. 

3. Length of Credit History (15%)

Having a longer history of credit activity is helpful to potential creditors and attests to your ability to manage multiple credit accounts over time. Credit agencies will factor an average age for your open credit lines when calculating your score, and since higher is better, hold your oldest accounts dear and only open new ones you plan to keep open.

4. Types of Current Credit (10%)

Often referred to as a good “credit mix,” having varied lines of credit – one or two credit cards, a car loan, a mortgage – makes a stronger case for creditworthiness than having multiple credit cards alone. Multiple credit accounts in your name will boost your score as you show credit agencies that you’ve been approved by a diverse set of lenders. A great rule in personal finance is to always diversify!

5. New Credit Inquiries (10%)

Credit agencies only factor hard credit inquiries into your credit score. A hard inquiry is any instance when a lender needs to review your credit before approving a major financial transaction. These include personal/student/business loans, new credit cards, mortgages, and auto loans. While these inquiries are necessary and will help build good credit over time, they should be made carefully and incrementally. Multiple hard inquiries (ie. applying for 2 credit cards in the same month) will impact your score immediately and may have credit agencies thinking you’re becoming too risky too quickly. The credit-building journey is one of moderation.

What’s not in your credit score

  • Your race, color, religion, national origin, sex and marital status
  • Your age
  • Your salary, occupation, or employment history
  • Where you live
  • Any interest rate you currently pay on any account
  • Any reported family support obligations
  • “Soft” credit inquiries
  • Any information not found in your credit report
  • Any information not proven to be predictive of future credit performance

Your standard FICO® Score will range from 300-850 based on the five key factors. However, other agencies may apply different scoring models with alternative weightings to specific groups of people, like those with little-to-no credit history. The key takeaway is to keep the factors that agencies monitor the most in mind before you make financial decisions. Spend wisely, repay regularly, and inquire methodically, and you’ll be well on your way to an excellent credit score!

If you don't know what your credit score is, just click here to find out where you can get it for free.

Source: myFICO.com

About the Author

Matt Bicknell

Matt Bicknell is a student at the University of Florida studying Finance. He is an active contributing author for Birch and is passionate about helping newbies become financally savvy.