Whether you like it or not, your credit score is a powerful number that can affect everything from your ability to buy a house to your candidacy for certain jobs. Unfortunately, building a good credit score is a slow and tedious process. Worse, just one misstep can undo months of hard work and positive activity. To prevent this from happening to you, you need to understand what affects your credit score so you can avoid credit-crippling mistakes.
Bill Pay History
Your payment history is the number one influential credit-scoring factor. According to CreditCards.com, this element comprises 35% of your total credit score. When calculating your score, FICO reviews past long-term spending behavior and uses it to predict future long-term performance. It also takes into consideration the recency, frequency and severity of missed payments.
If your credit score is low, or if you want to maintain your credit health, the best thing you can do is make consistent and timely payments. For each timely payment you make, you’ll see a point boost of about five points. Though that may seem small, five point boosts can add up over the number of cards you have and with each passing month.
The second greatest factor FICO considers when calculating your score is the debt to credit limit ratio you maintain each month. This factor accounts for 30% of your overall score.
In FICO’s eyes, borrowers who routinely max out their credit cards each month or who are always very near their credit limits are irresponsible when it comes to money. Though there is no benchmark credit utilization ratio the system uses, it does admit that those with the highest credit scores have a credit utilization ratio of less than 6%.
Credit utilization and payment history make up 65% of your total credit score. The additional three factors simply help to transition you across brackets, from, say, fair to good, good to very good, and very good to exceptional.
Credit History Length
The length of your credit history makes up 15% of your FICO score. Typically, the older your credit history, the more desirable of a borrower you are, as longevity tells lenders you know how to handle credit. However, your credit history may hurt you if you have a long history of bad credit behavior.
For instance, if your record shows that you spent five years making late payments, missing payments or closing accounts, a lender may be hesitant to finance you, even if you were able to boost your score to the “Good” or “Very Good” range over the past six months. Your credit history lends insight into your long-term spending behavior, so it’s best to maintain your credit health from the moment you open your first account, and not to just start when you want to finance something, such as a home.
Not all credit is created equal. Credit card debt is different from personal loan debt which is different from auto loan debt. According to the experts, FICO views those who can handle a variety of types of credit as less risky than those who maintain one type of credit. Individuals who do not have credit cards at all score low in this category, as FICO deems them to be of higher risk than those with multiple credit cards. This is the case even if that person has an outstanding mortgage repayment history.
Before you go and apply for various types of credit, however, note that this factor only makes up about 10% of your credit score. Applying for a bunch of new cards and loans may even damage your score, as the next point indicates.
New Credit Inquiries
You need credit to build credit, and you need a good amount of revolving credit to boost your score, yet you get dinged when you inquire about new offers. New credit inquiries make up about 10% of your credit score, but instead of helping it, it hurts it. Though one or two credit queries won’t have that grave of an impact, multiple credit requests in a short amount of time create a red flag. Why do you need all this new credit all of a sudden? Are you short on funds and needing to pay for necessities with credit? These are concerns that FICO has when a single person suddenly tries to acquire 10 new cards.
There is good news, though. FICO only factors the inquiries you made within the past 12 months into your score. After 24 months, all inquiries disappear from your report entirely.
Factors That Do Not Affect Your Score
Now that you know which factors affect your score, it’s time to address those that don’t. One of the most common misconceptions is that checking your credit score will ding you. It doesn’t. Though a credit check does pop up on your credit report as a “soft inquiry,” it won’t change your score.
Other factors that won’t help or hurt you, at least not directly, include bank balances, income and employment status. Though these factors can affect your ability to get approved for financing, they in no way factor into FICO’s scoring algorithm. Nor do your age, debit card usage or marital status.
Knowing which factors do and do not affect your FICO score can help you identify areas of your credit report that could use improvement. This knowledge can also help you get on the path to exceptional credit health.