5 Major Credit Score Factors

5 major credit score factors

By Michelle L. Black

Credit scoring is somewhat secretive. That may seem unfair to consumers, but there’s a reason the creators of credit scores don’t share the exact algorithms they use to create credit scoring models. No company wants to reveal how it designs its product — especially not to competitors.

However, both FICO and VantageScore (the two biggest credit score creators in the U.S.) offer you a glimpse at the factors that shape your credit scores. Once you understand how different actions influence credit scores, you can discover how to improve your score yourself.

Although the VantageScore credit score is widely used (and provided to Self members as a credit monitoring benefit), we’ll focus on FICO Scores for the rest of this article. FICO Scores are the most popular brand of credit score among most major lenders.

In this guide, we'll walk through the 5 major factors that impact your credit score and some ways you can use that information to improve your credit.

The 5 major factors that affect your credit

Your FICO Scores are based on information found in your credit reports. So, data found outside of your credit reports, like criminal records, won’t impact these numbers.

The information that influences a FICO Score is broken down into five categories:

  1. Payment history (35%)
  2. Amounts owed (30%)
  3. Length of credit history (15%)
  4. Types of credit used (10%)
  5. New credit (10%)

Payment history — 35%

payment history

Payment history impacts your credit score more than any other information on your credit report. It’s worth an impressive 35% of your FICO Score.

The purpose of a credit score, called its “state design objective,” is to predict the likelihood you’ll become 90 days late (or worse) on any credit obligation within the next 24 months. If you already have a history of paying bills late, the odds that you’ll pay late in the future are much higher.

And, if your risk is higher, the credit score you earn will be lower.

The credit reporting agencies — Equifax, TransUnion, and Experian — may receive updates about your payment history from any of the following companies (called data furnishers):

  • Credit card issuers
  • Lenders (auto loan, mortgage loan, student loan, personal loan, credit builder loan, etc.)
  • Collection agencies

Aside from collection accounts, the accounts above have the potential to help you build better credit. But you’ll need to manage each account carefully. If late payments appear on your credit file, the account could hurt your credit score instead.

Amounts owed — 30%

Amounts owed

Amounts owed is the second-most influential category when it comes to your FICO Score. Worth 30% of your FICO Score, the amount of debt you carry (especially credit card debt) is nearly as important as whether you pay your bills on time.

The primary factor FICO considers in this category is known as credit utilization. Your credit utilization ratio describes how much of your credit limits you use each month on credit card accounts.

For example, if you have a card with a $1,000 credit limit and an $800 balance, your credit utilization rate is 80%.

High credit utilization levels indicate that you’re a higher risk borrower. So, your credit score will likely be lower if you tap into too much of your credit card limits. You should always keep your utilization ratio below 30%.

Yet if you want a chance to earn great credit scores, aim to maintain the lowest utilization rate you can (ideally 5% or less).

Length of credit history — 15%

Length of credit history

FICO doesn’t consider your age when it calculates your credit score. The age of your accounts, however, is another story. Your length of credit history is worth 15% of your FICO Score. Statistics show that consumers with longer credit histories are less risky borrowers.

A few of the factors FICO considers in the length of credit category include:

  • Your average age of accounts
  • The age of your oldest and newest account
  • How long each account has been open
  • The length of time since you’ve used each account

Be cautious about opening too many new accounts as this could lower your average age of credit. Also, avoid closing accounts when possible.

Closing an old credit card, for example, won’t cause the account to stop aging. (That’s a myth.)

But a closed, positive account will eventually fall off your credit in around 10 years. When that happens, your average age of credit might decrease and your score could too.

Types of credit used — 10%

Types of credit header

Do you have a mixture of account types on your credit report — both revolving and installment? If so, FICO scoring models may reward you in the form of extra points for your credit score.

The types of credit you use, also called your credit mix, is worth 10% of your credit score. Credit mix isn’t nearly as influential over your score as other categories. Yet you might still earn extra points in this category over time.

FICO evaluates whether you have experience managing both revolving accounts (like credit cards) and installment accounts (like personal loans or credit builder loans). If your credit experience is limited to just one type of account, you may not earn as many points as you could have otherwise.

New credit – 10%

New credit accounts

The final 10% of your FICO Score comes from the new credit category of your credit report. Applying for too much new credit or opening too many accounts in a short period of time could hurt you here.

When someone requests a copy of your credit report, a record of the access is added to your credit report. This record is called a credit inquiry.

Hard inquiries, or those that might damage your credit score, take place whenever you apply for something and the lender pulls a copy of your credit report. FICO considers the number of hard inquiries that appear on your credit report within the last 12 months.

Too many recent inquiries could be a sign of financial distress and your credit scores might decline. Yet the potential credit score impact of inquiries is often exaggerated. New credit only accounts for 10% of your score. Plus, some hard inquiries might not affect your credit score at all.

How can you improve your credit score?

1 - Make every payment on time

Do you already have late payments on your credit reports? Thankfully, they’ll impact your credit score less and less as time passes. Credit scores pay more attention to recent late payments than they do late payments made in the past.

Eventually (after 7 years), old late payments will fall off your credit report completely.

2 - Pay down credit card balances

When you reduce your credit card debt, it should trigger a decrease in your credit utilization ratio. Lower credit utilization may impact your credit score in a positive way — sometimes significantly.

3 - Ask a loved one for help

Do you have a friend or family member who might add you to an older credit card account as an authorized user? If so, the account might help you increase your average age of credit and, by extension, your credit score.

Just be sure the account has on-time payment history and a low utilization rate before your loved one adds you.

4 - Consider adding a new account

You shouldn’t open accounts you don’t plan to use in an effort to improve your credit mixture. However, if you only have credit cards on your credit report, adding a credit builder loan might benefit you. The opposite is true as well.

Just be sure that whatever type of account you open, you manage it well with on-time payments and (if applicable) low utilization.

5 - Limit credit inquiries

It’s fine to check your credit report as often as you like. Doing so will never harm your credit score. But you should only let lenders pull your credit when you really need something.

For example, it’s generally fine to apply for a new account because you’re working to establish or rebuild credit. Yet you’ll want to avoid applying for a new retail store card at checkout because you want a 20% discount on your purchase.

Next steps

Now that you understand what influences your credit scores, you should take the time to check your three credit reports from Equifax, TransUnion, and Experian. You can claim a free report from each credit bureau once every 12 months from AnnualCreditReport.com.

As you look over your reports, search for areas where you can improve. (It’s also wise to search for credit errors at the same time.) Earning better credit takes time, but the benefits of good credit make your hard work worth it in the long run.

About the author

Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication.

Written on January 16, 2020

Self is a venture-backed startup that helps people build credit and savings.
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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