Wonder how your financial decisions affect your credit score? Familiarizing yourself with the components of your credit score calculation can help you become more financially savvy. Listed below are five main factors that affect your FICO credit score, along with a percentage that reflects how heavily the factor is weighed in calculating FICO scores for the general population. Keep in mind that since everyone’s credit situation is unique, each factor might weigh more or less heavily in determining an individual’s credit score.
What Factors Affect Your Credit Score?
1) Your payment history – This makes up about 35% of a typical credit score. Your payment history shows lenders how responsible you have been with credit, such as whether you pay on time and how long it’s been since your last late payment, if any. How late payments affect your credit score depends on three main factors, including:
- How long ago the borrower has made a late payment. The longer it has been, the less it affects a score.
- How frequent the borrower has made late payments. One late payment is not as bad as a dozen.
- How long the payment was late for. A payment that is 10 days late is not as serious as one that is 60 or 120 days late. Collections, tax liens, and bankruptcy are among the largest negative marks.
If you have never made a late payment, your clean history will help your score, but it still doesn’t mean that you will get a “perfect” score.
2) Amounts Owed – This makes up about 30% of the typical score. The score looks at the total balance owed on all accounts, as well as how much you owe on different types of accounts (credit, mortgage, auto loans, etc.). Using a higher percentage of your credit limit can hurt your score. People who are close to maxing out their credit limits have a much higher rate of default than people who limit their credit use. The bigger the gap is between the balances sitting on your card and your credit limit, the better.
The score also looks at the progress you’re making on paying down installment accounts, such as auto loans and mortgages. It compares how much you owe to what you originally borrowed. Paying down the balances over time tends to help your score.
3) Length of Credit History – This makes up about 15% of the typical score. Usually, the longer you’ve had credit, the better. This factor takes into account:
- The age of your oldest account and
- The average age of all your accounts.
4) Your Last Application for Credit – This makes up about 10% of the typical score. Applying for a lot of credit in a short time can harm your credit score, especially if you don’t have a long credit history. This factor takes into account:
- How many accounts you’ve applied for recently
- How many new accounts you’ve opened
- How much time has passed since you’ve applied for credit
- How much time has passed since you opened an account
5) Types of Credit Used – This makes up about 10% of the typical score. The FICO scoring formula wants to see a “healthy mix” of credit, such as if you have revolving debts like credit cards, and installment debts like auto loans, mortgages, or personal loans. If your installment loans are no longer open but they still show up on your credit report, it can help your credit score. This is because with installment loans, lenders generally require more documentation and take a closer look at your credit before granting the loan. Showing a good ability to handle a variety of credit types can help your credit score. However, if you don’t need it, don’t apply for credit just to boost your score, as this can backfire.
Bankcards, such as Visa, MasterCard, Discover and American Express are typically better for your credit score than department store or other “finance company” cards. Finance companies specialize in consumer lending and, unlike banks, don’t receive deposits.