What are the factors that impact the credit score?

When you apply for a loan, a cellphone or any number of other activities, lenders and potential creditors will look at your credit score to help gauge your financial stability and thus the risk of you defaulting on a financial responsibility. The better your credit score is, the higher your chances are for getting approved.

There are many different types of credit scores, but the FICO® score is the most common credit scoring model today and the one that is used by most lenders.

FICO scores range from 300 to 850 points. Typically, a score more than 650 is considered "fair," a score more than 700 is considered "good" and a score more than 750 is considered "excellent."

The primary factors that affect your credit score include payment history, the amount of debt you owe, how long you've been using credit, new or recent credit, and types of credit used. Each factor is weighted differently in your score.

Let's take a closer look at the factors that make up your FICO credit score and the importance of each in how the model calculates your score.

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Although there are many credit-scoring models, the goal of these formulas is to figure out your credit risk — that is, the likelihood of you paying your bill on time, or even at all. And whether you’re looking at a FICO® or VantageScore® credit score, your scores are based on the same information: the data in your credit reports.

While various credit-scoring models may treat factors differently, the leading models, FICO® and VantageScore®, place similar relative importance on the following five categories of information. We’ve ranked them by which ones are often most important to the average consumer.

1. Most important: Payment history

Your payment history is one of the most important credit scoring factors and can have the biggest impact on your scores.

Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them. The effects of missing payments can also increase the longer a bill goes unpaid. So a 30-day late payment might have a lesser effect than a 60- or 90-day late payment.

How much a late payment affects your credit can also vary depending on how much you owe. Don’t worry, though: If you start making on-time payments and actively reduce the amount owed, then the impact on your scores can diminish over time.

If you’re having trouble making payments at all, you could also wind up with a public record, such as a foreclosure or tax lien, that ends up on your credit reports and can hurt your scores. Sometimes a single derogatory mark on your credit, such as a bankruptcy, could have a major impact.

Credit usage is also an important factor, and it’s one of the few that you may be able to quickly change to improve (or hurt) your credit health.

The amount you owe on installment loans — such as a personal loan, mortgage, auto loan or student loan — is part of the equation. But even more important is your current credit utilization rate.

Your utilization rate is the ratio between the total balance you owe and your total credit limit on all your revolving accounts (credit cards and lines of credit). A lower utilization rate is better for your credit scores. Maxing out your credit cards or leaving part of your balance unpaid can hurt your scores by increasing your utilization rate.

Sarah Davies, senior vice president of analytics, research and product management at VantageScore, says that for VantageScore® credit scores, your overall utilization rate is more important than the utilization rate on an individual account.

But utilization rates on individual accounts can also affect your credit scores. This means you should pay attention to not just your overall credit utilization, but also the utilization on individual credit cards. Having a lot of accounts with balances might indicate that you’re a riskier bet for a lender.

Keep in mind that you can pay your bill in full each month and still appear to have a high utilization rate. The calculation uses the balance that your credit card issuers report to the credit bureaus, often around the time it sends you your monthly statement. You may have to make early payments throughout your billing cycle if you want to use a lot of credit and maintain a low utilization rate.

3. Somewhat important: Length of credit history

A variety of factors related to the length of your credit history can affect your credit, including the following:

• The age of your oldest account
• The age of your newest account
• The average age of your accounts
• Whether you’ve used an account recently

Opening new accounts could lower your average age of accounts, which may hurt your scores. But the hit to your scores could also be more than offset by lowering your utilization rate and increasing your total credit limit, making sure to make on-time payments to the new card and adding to your credit mix.

Closed accounts can stay on your credit reports for up to 10 years and increase the average age of your accounts during that time. But once the account drops off your credit reports, it could lower this factor, and hurt your scores. The impact could be more significant if the account was also your oldest account.

Having experience with different types of credit, like revolving credit card accounts and installment student loans, may help improve your credit health.

Since your credit mix is a minor factor, you probably shouldn’t take out a loan and pay interest just to add to your credit mix. But if you’ve only ever had installment loans, you may want to open a credit card and use it for minor expenses that you can afford to pay off each month.

Creditors may review your credit reports and scores when you apply to open a new line of credit. A record of this, known as a credit inquiry, can stay on your credit reports for up to two years.

Soft inquiries, like those that come from checking your own scores and some loan or credit card prequalifications, don’t hurt your scores.

Hard inquiries, when a creditor checks your credit before making a lending decision, can hurt your scores even if you don’t get approved for the credit card or loan. But often a single hard inquiry will have a minor effect. Unless there are other negative marks, your scores could recover, or even rise, within a few months.

The impact of a hard inquiry may be more significant if you’re new to credit. It can also be greater if you have many hard inquiries during a short period.

Don’t be afraid to shop for loans, though. Credit-scoring models recognize that consumers want to compare their options, so multiple inquiries for certain types of loans, like mortgage loans, auto loans and student loans, may only count as one inquiry. You typically have 14 days to shop for these kinds of loans. And though it could be longer depending on the scoring model, you may want to stick to getting rate quotes within those 14 days since you probably won’t know which model is being used to generate your score.

Bottom line

There are many credit scores, and you may not know which one a lender is going to use when considering your application. But consumer credit scores, which are determined based on the information in your consumer credit reports, weigh factors in a similar manner. If you focus on improving these factors, you could improve your credit health across the board.