Your credit score is one of the most important numbers in your life. It can determine how much you pay for a car loan, mortgage, or credit card. It can also affect your ability to get a job or rent an apartment. Many people don’t know what factors affect their credit score, so they are unable to take proactive measures to improve it.
In this blog post, we will discuss the five main factors that influence your credit score and provide tips on how to improve your credit rating!
Learning about all the factors that can affect your credit score can be overwhelming. That’s why we will break it down into 5 main factors that cause good credit or bad credit:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- Credit Diversity (15%)
- Inquiry Frequency (15%)
As you can see, your payment history has the biggest impact on your credit score, followed by the amount of debt you have. This is why it’s so important to make all of your payments on time and keep your balances low.
If you have a bad credit score, don’t worry! There are steps you can take to improve your credit rating. The most important thing is to start making all of your payments on time and reducing your debt. You should also avoid opening new credit accounts if you are struggling to pay down your other debts. It’s also important to only apply for credit when you need it.
Now that you know the basics, let’s go into more detail about each factor that affects your credit score.
Table of Contents
Factor #1 – Payment History
The first factor that affects your credit score is your payment history. This includes both credit cards and loans. If you have a history of making late payments, your credit score will be lower. This is the most important factor in your credit score, so it’s important to make all of your payments on time.
How To Identify:
You can check your credit report to see if you have any late payments. However, it must be a soft check and not a hard check. Keep reading as we go over in detail the difference between the two.
Another way to understand your payment history is by looking at your credit card statements. This will show you how often you make late payments.
How To Improve:
To improve your payment history, make sure to always pay your bills on time! You can set up automatic payments so you never have to worry about forgetting. You should also try to pay off your credit card balances every month. If you can’t do this, make sure to at least make the minimum payment.
Factor #2 – Amounts Owed
The second factor that affects your credit score is the amount of debt you have. This includes both revolving debt (such as credit card debt) and non-revolving debt (such as student loans). The more debt you have, the lower your credit score will be. To improve your credit score in this area, try to pay down some of your outstanding debts.
The term credit card utilization refers to the amount of credit you’re using compared to your credit limit. For example, if you have a credit card with a $1000 limit and you’re using $500 of it, your credit utilization would be 50%. Credit utilization is a major factor in credit scores.
How To Identify:
You can check your credit report to see how much debt you have. This includes both revolving and non-revolving debt. Your credit card should also display your total credit limit. If you cannot find it, please ask your provider because knowing this information is essential to improving your credit score.
How To Improve:
Try to keep balances below 30% of your credit limit. If you have a lot of debt, you can try a debt consolidation loan to lower your monthly payments. You should also avoid opening new credit accounts unless you really need them.
You can also apply to raise your credit limit. This will help keep you under the 30% credit limit utilization. It’s also important to have discipline and only spend on a credit card if you know you will have the funds to pay it off.
Factor #3 – Length of Credit History
The third factor that affects your credit score is the length of your credit history. This is the amount of time that you have been using credit. The longer your credit history, the higher your credit score will be.
How To Identify:
The credit reporting agency will have a credit history on file for each person. The credit history will show how long the credit has been used. If you haven’t opened any credit accounts, then you will not have a credit history.
How To Improve:
To improve your credit history, try to get a credit card or loan and make all of your payments on time. Do not close credit card accounts! This will actually hurt your score. This factor requires patience, but if you keep using credit and making on-time payments, your credit history will improve over time.
Factor #4 – Credit Diversity
The fourth factor that affects your credit score is the types of credit you have. This includes both revolving credit (such as credit cards) and non-revolving credit (such as student loans). Having a mix of both types of credit will help improve your credit score. To get started, try to get a few different types of credit accounts and use them responsibly!
For example, if you only have credit cards, try to get a personal loan. Or if you only have student loans, try to get a credit card. Having a mix of credit types shows that you’re a responsible borrower and that you can handle different types of credit.
How To Identify:
To find out how many types of credit you have, check your credit report. You should see a section that lists all of your credit accounts. If you only have one type of credit, it will be easy to spot.
How To Improve:
The best way to improve your credit score in this area is to get a few different types of credit accounts and use them responsibly. Do not open new credit accounts unless you can confidently manage them.
This only accounts for about 15% of your credit score, so it’s not as important as the other factors. But it’s still a good idea to have a mix of credit types. It can be helpful because different cards will offer different rewards or perks.
However, you must pay off all of your credit card balances in full every month. As mentioned in factor number one that affects your credit score, even one late payment can hurt your credit score.
Factor #5 – Inquiry Frequency
The fifth and final factor that affects your credit score is inquiries. Inquiries are when lenders check your credit report when you apply for credit. Too many inquiries can lower your credit score. To avoid this, only apply for a credit check when you need it.
Hard credit checks are inquiries that can lower your credit score by a few points. They’re also called hard pulls or hard inquiries. These are credit checks that are done when you apply for credit. For example, when you apply for a credit card or loan, the lender will do a hard credit check.
How To Identify:
Be careful when checking your credit report as it may be considered a hard credit check! If you see too many hard credit checks on your report, it could lower your credit score. I know it may seem unfair as if you’re being penalized for trying to get credit, but too many inquiries can be a red flag for lenders.
How To Improve:
The best way to improve your credit score in this area is to only apply for credit when you really need it. If you are curious about your progress in improving your credit score but don’t want to harm it, you can do a soft check.
A soft credit check is an inquiry that won’t affect your credit score. These are also called soft pulls or soft inquiries. Soft credit checks are done when you check your own credit report or when you’re pre-approved for a credit card. For example, if you see a credit card offer that says “pre-approved,” that means the credit card company did a soft credit check on you.
You can also do a soft credit check by pulling your own credit report. This is a great way to check your progress in improving your credit score. Just remember that when you do a soft credit check, it’s for your own personal use. Don’t share your credit report with anyone else!
If you are unsure if the credit check is soft or hard, you can always ask the credit card company or lender. They should be able to tell you if it’s a soft or hard credit check.
What is the Credit Score Range?
The credit score range is from 300 to 850. The higher your credit score, the better. A credit score of 700 or above is considered good, while a credit score of 850 is considered excellent.
On average, your credit score can move up or down by five to ten points each month. So if you see a sudden drop in your credit score, don’t panic! Instead, check to see if anything has changed on your credit report. If you see any negative information, take steps to improve your credit score.
Ideally, you want to see a gradual increase in your credit score over time. This means you’re doing a good job of managing your credit. Managing credit is not a one-time event. It’s a lifelong process.
Frequently Asked Questions about Factors That Affect Credit Scores
Q: Will closing credit accounts improve my credit score?
A: It depends. If you close an account that has a balance, it will likely hurt your credit score. This is because you will have less available credit, which can increase your credit utilization ratio.
Q: Should I cancel my credit cards if I don’t use them?
A: No, you don’t need to cancel your credit cards if you don’t use them. In fact, it’s actually good to keep old credit accounts open because it can help improve your credit score.
This is because closing credit accounts can hurt your credit score in two ways. First, it will raise your credit utilization ratio. Second, it will shorten your credit history, which is a factor in your credit score.
Q: I have bad credit. Can I still get a credit card?
A: Yes, you can still get a credit card even if you have bad credit. There are credit cards designed for people with bad credit. These cards usually have higher interest rates and fees than regular credit cards.
Q: I’m trying to improve my credit score. How often should I check my credit report?
A: You should check your credit report at least once a year. This is because you want to make sure there are no errors in your report. Errors can happen, and if they’re not corrected, they can hurt your credit score.
You can get a free copy of your credit report from each of the three major credit bureaus – Experian, Equifax, and TransUnion. You’re entitled to one free credit report from each bureau every year. You can also get your credit score for free from many credit card companies and personal finance websites.
Checking your credit report and credit score regularly is a good way to stay on top of your credit situation and make sure you’re taking steps to improve your credit score.
Q: I have good credit. Will that help me get a lower interest rate?
A: Yes, having good credit can help you get a lower interest rate. This is because lenders see good credit as a sign that you’re a responsible borrower.
When you have good credit, it means you’ve been managing your credit well. This includes the five factors that affect your credit score mentioned in this article.
Q: What is required to get approved for a credit limit increase?
A: Generally, you’ll need to have good credit and a history of responsible credit use to get approved for a credit limit increase.
You may also need to provide income information and other financial details to the credit card issuer. They’ll use this information to decide if you can handle a higher credit limit.
Q: I’m a young adult, should I get a credit card even though I don’t need it?
A: Yes, you should get a credit card even if you don’t use it. This will help you build credit so you can get approved for loans and other credit products in the future. It will show your credit history to future lenders, which can help you get better terms. Just make sure to pay it off in full each month if you do have some credit card debt.
What Factors Affect Your Credit Score? (Conclusion)
Five factors affect your credit score: payment history, credit utilization, credit mix, inquiry frequency, and credit age. By taking steps to improve in each of these areas, you can improve your credit score and get access to better interest rates and terms!
Remember that the most important factor is always payment history. Even one late payment can hurt your credit score, so make sure you always pay on time! And don’t forget to use credit counseling services if you need help getting your finances back on track.
If you have bad credit, don’t despair! There are still things you can do to improve your credit score. Just remember to be patient and stay disciplined, and you’ll see your score start to go up in no time.
Overall, a holistic approach is best when trying to improve your credit score. By following the tips in this article, you can get on the right track and start seeing results!
