Factors That Influence Your Credit Score (2024)

For many people, credit scores can be very intimidating and confusing, as they involve lots of numbers and calculations that most individuals don’t understand. However, credit scores are incredibly important for your financial future, and you need to be able to understand how they are influenced so you can build a solid, high credit score.

Here is some basic information about how credit scores are calculated, what they are, and how you can improve yours.

What is a Credit Score?
In layman's terms, a credit score is a measure of how reliable you are as a borrower. When you’re looking to get a loan, lenders look at your score to see how likely you are to pay back the money that you’re borrowing. Your score is also used by lenders to understand your current finances, payment history, length of credit, how much credit you’re currently using, and other debts attached to your name.

Who Has Control Over Your Credit Score?
The two major scoring systems are VantageScore and Fair Isaac Corporation (FICO). FICO has five categories that help to determine your score while VantageScore has six. These categories are used to explain your overall creditworthiness to potential lenders.
After the various categories have been calculated by the two institutions, you’re assigned a credit score. Generally, anything above 700 is considered “good”. Anything below that number will fall into the “fair” or “poor” range. 850 is the highest your credit score can get and according to Experian, only 1.2% of Americans have a perfect 850 credit score.

What Items Influence Your Credit Score?
Payment history: The biggest factor in determining your credit score is payment history. Every time you pay a credit card bill, car payment, house payment, student loan payment, etc., it gets added to your history. It’s important that all of your payments are paid before the due date listed on your statement. Just a single late payment can have a significant effect on your credit score, which can reflect on your report for up to seven years.
The best way to avoid forgetting to pay a bill is to set up an auto-payment system with your lender. You can always pay a bill early, but an auto-payment system is great in the event that you forget to pay.
Credit type & length of time open: Having different types of credit accounts can work in your favor. This shows the lender that you have diversity in your credit and you’re not just focusing on one area. Auto loans, student loans, credit cards, and home mortgages are all classified differently. The longer an account has been open, the more beneficial it will be to your credit score. If you have old accounts that you may not be using, it could be helpful to keep them open as it will increase your average length of credit history.
Credit utilization: The total amount of credit that you’re using at any given time will have a significant impact on your score as well. Just because you have a $15,000 total credit limit, doesn’t mean you should be using the whole amount. According to Staples, you should keep your balances under 30 percent of your total credit limit.
Hard Inquiries: Don’t have shiny object syndrome and apply for every new credit card under the sun. This can affect your score negatively as it triggers a hard inquiry. This occurs when you apply for a new line of credit. When a creditor has to request access to your credit file, it flags the reporting institutions that someone is looking into your credit history. Too many hard inquiries can signal to a lender that you’re taking on too much debt in relation to your income level. It’s good to have a variety of credit accounts, but be mindful that each time you apply for something new, your score will drop.

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