- The five factors that influence your credit score aren’t weighted equally.
- Your past payment history impacts your credit score the most.
- Perhaps surprisingly, new credit and "hard inquiries" make up only about 10% of your overall credit score weighting.
We’ve written about the basics when it comes to your credit score – the three-digit number, usually ranging from 300 to 850, used by credit reporting agencies to generate a snapshot of your financial stability for lenders and credit card companies.
And we’ve briefly highlighted the various financial behaviors that go into compiling your score. Essentially, financial actions that look responsible to a potential lender will boost your credit score. Riskier, inconsistent, or irresponsible behavior, on the other hand, will hurt your standing.
If you want to improve your score, however, it’s important to know that not every financial behavior is treated equally. While the importance of any action can differ slightly depending on which credit bureau is assembling the information and which credit score model is used, most scoring systems generally follow the pattern designated by Fair Isaac, the company that originated the commonly used FICO credit score.
All of these factors can influence your score, but if you’re looking to get smart on making changes that will impact your score the most, start at the top and work your way down.
35% -- Payment history
Potential lenders and credit card companies put a lot of emphasis on how timely your debt payments have been in the past. That’s because your past tendencies suggest how likely you are to repay money on time. This doesn’t mean you can’t have a few late payments – we all do. But lenders see patterns of late payments – or no payments at all – as a red flag. Your history includes all types of credit-related accounts you may have: credit cards, retail charge cards, installment loans like a car payment, and mortgage loans.
Late payments are also relative in nature – if you do have some on your record, your credit score will be affected by how late those payments were. All things being equal, paying a week late is better than paying a month late. Similarly, a late payment of $40 is less consequential than a late payment of $400.
Your credit score will also likely take a hit if any of your accounts have gone to a collection agency for nonpayment. If they have, your credit score will be affected by both frequency and dollar amounts.
30% -- Amounts owed
Having debt on your record isn’t inherently bad. The question is – how much debt do you have compared with your total available credit? If that percentage is high, your credit score will be lower because it causes lenders to worry that you may be overextended and more likely to make late or missed payments.
That said, having some debt can be better than having none at all because creditors are looking for proof that you’ve been able to borrow money or be extended credit and pay it back in a timely fashion.
The make-up of your debt also is a factor. Credit scores reward consumers that have shown the ability to take on different types of credit and handle them all responsibly.
15% -- Length of credit history
Generally, the longer your credit history, the better off your credit score will be. Lenders and credit card companies are more inclined to extend credit to somebody who has shown a longer track record of using credit.
Your credit score will be affected by how long your accounts have been established, including the age of your oldest account, the age of your newest account, and the average age of all accounts. Relevant information also includes how long specific credit accounts have been established and how long it has been since you used certain accounts.
10% -- Credit mix
Your overall FICO score could be helped by how many different accounts you have, regardless of your amount of debt. This usually won’t be a significant factor, but it could prove to more important if you don’t have a lot of other information on which to base a score (this doesn’t mean you should take out new accounts you don’t intend to use).
10% -- New credit
A small part of your score will be determined by how many new accounts you have. Potential creditors want to know how many accounts you’ve applied for recently and when you last opened your new account. A flurry of inquiries into starting new credit accounts – often known as a “hard inquiry” – could suggest cash-flow issues that could affect someone’s ability to pay off future debts.
Remember: every time you apply for credit, a “hard inquiry” is placed on your credit report and becomes part of your score. Specifically, inquiries remain on your credit report for two years, although your score only considers inquiries made in the last 12 months.
However, only inquiries that affect credit risk are considered “hard.” There are also “soft” inquiries that are excluded from your credit score, including things like background checks done by potential employers, or your own inquiries into knowing your current credit score.
Keeping these credit score factors in mind will help you better understand, and manage, your credit score. If you have a low score, think about tackling the factor(s) that will provide you the best bang for the buck to raise your score.