How Credit Works

What Affects Your Credit Score?

Just a small, three-digit number can have a huge impact on your life. Your credit score is a gauge lenders use to evaluate your creditworthiness and trustworthiness. It dictates not only whether you’ll be approved for things such as student loans or mortgages, but also, and sometimes more importantly, how much you’ll pay for each of those items. To truly understand what affects your credit score, let’s take a look at what goes into it.

How is my credit score calculated?

The first thing to note when asking this question is to understand that there are multiple credit scoring models. The most commonly known is FICO, which boasts 90% of lenders using it to make credit decisions. Until 2006, FICO scores were relatively unchallenged - that is until VantageScore entered the scene. Vantage score was created by the three major credit bureaus - Experian, TransUnion, and Equifax - in order to assure accuracy in reporting. While both FICO and VantageScore rely on the same basic categories to establish credit history - they place slightly different emphasis on certain categories.

FICO Score
  • Payment History - 35%
  • Amounts Owed - 30%
  • Length of Credit History - 15%
  • New Credit - 10%
  • Types of Credit - 10%
VantageScore 3.0
  • Payment History - 40%
  • Amounts Owed - 20%
  • Length of Credit History - 21%
  • Balances - 11%
  • Recent Credit - 5%
  • Available Credit - 3%

The importance of each of these categories varies slightly per person. For example, people who have not been using credit long will be factored differently than those with a longer credit history. Learn more about how your credit score is calculated.

What Affects My Credit Score?

While the factors above make up your credit score, it can be a little confusing as to what will actually make your credit score fluctuate. Below are just a few examples…

  1. Opening new lines of credit. Opening a new line of credit can have different effects on your credit score depending on the scenario. If you have three credit cards already, and you open a fourth credit card - your credit score is most likely going to drop. This signals to lenders that you may be in financial trouble and are looking for fast money. However, if you have three credit cards and apply for something that is not a line of credit like a credit builder loan or an auto loan, your credit score may improve. This diversifies your credit file and shows that the credit you’re requesting has a specific purpose.
  2. Buying a new cell phone (or setting up cable/internet). When entering into a new cell phone contract, most providers will run a standard soft credit check. However, some will run a hard credit check, which makes it appear as though you’re applying for a new line of credit. While hard credit checks aren’t necessarily bad, having too many signals to lenders that you may be having financial troubles and are digging yourself too deep. Hard credit checks generally take about 2 years to fall off your record and can cause significant damage if they add up. Be sure to ask your cable, internet, or cell phone provider which type they run before signing up for a new contract.
  3. Closing old or unused credit accounts. The length of your credit history is extremely important as it gives bureaus and lenders a snapshot of how you’ve grown financially over the course of your life. You may have an account that you barely use and it’s logical to think that closing it is the responsible choice. However, before you do this - consider how old the account your closing is. If it’s been open for a significant amount of time or is your oldest account - it could hurt your credit score to remove this significant portion of your credit history.
  4. Ignoring traffic tickets. It might take a little while, but unpaid parking tickets can take a toll on your credit if you’re not careful. If left unpaid for long enough, local and state governments can report your failed payment, as well as, send your bill to a collection agency. Don’t forget - every ticket you get has your name, license plate number, and usually driver’s license number associated with it. They know who you are - and eventually - they will find you.
  5. Keeping your credit cards close to their limits. While taking the strategy of paying for everything with your credit card and paying it off when your paycheck arrives isn’t necessarily bad, it can affect your credit score. Keeping your credit cards consistently close to their limits can signal a high credit utilization ratio and lower your credit score. Most experts recommend keeping your credit utilization ratio below 30% at all times.
  6. Not paying library fines. Sure, a $5 fine seems harmless and easy to blow off - but with local budgets tightening and libraries fighting to stay afloat - some libraries have been sending even the smallest of fines to collection agencies. On top of this, collection agencies are able to add their own fees onto the original debt so your once simple $5 fine could turn into a $30 delinquent account.
  7. Skipping rent. Ah, rent. The great devourer of paychecks. While Experian recently started factoring in on-time rent payments, you don’t exactly get a whole lot of credit for being responsible. But don’t be fooled - late payments or skipped payments can be reported directly by your landlord to credit bureaus and can have a significant impact on your credit score. If your landlord sends the bill to a collection agency, then you can definitely expect to see a large negative impact.
  8. Ignoring medical bills. You can’t always predict when a big medical bill is going to hit - even if you have top of the line insurance. However, ignoring these bills is not the answer. Not only can health care providers report late or missed payments directly to the credit bureaus - they can also send your account to a collection agency. Most health care providers understand the rising cost of healthcare these days and are willing to put together a payment plan - especially if you’re able to pay a large chunk of the bill up front. Don’t ignore their calls and letters - work with them to create a solution.
  9. Not cancelling your gym membership properly. When setting up a gym membership, the gym usually recommends setting reoccuring payments to a linked credit card or checking account. However, when canceling a membership, gyms tend to have a lot of paperwork and specific procedures to make sure you really want to leave. Where trouble can arise is if you fail to follow the proper procedures and instead opt to disallow the payments from your linked card or account. While you’re no longer paying for the membership, that doesn’t mean the membership is over and doesn’t need to be paid (at least in the gym’s eyes). Gyms can not only report missed payments to credit bureaus, but they can also send your growing membership debt to collection agencies.
  10. Not paying your taxes (or racking up back taxes). While you’re free to pay your taxes late if the government owes you money, it doesn’t exactly work the same way when it’s the other way around. If you owe the government unpaid taxes, they have the power to place a tax lien against you. A tax lien is a public record that appears on your credit report and worse yet, can stay on your report for up to 15 years.
  11. Missing utility payments (or forgetting to close the account). Similar to rent, on-time utility payments don’t count for much. However, miss a couple payments or habitually pay late and your utility company has the power to report it. This can also creep up when you move and leave an account unsettled. Be sure to always provide a correct forwarding address and make sure the account is completely closed and paid off.

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