5 Things That Will Affect Your Credit Score

by Allison Wignall on June 4 2021

Credit score – that one critical number that has a major influence on your financial future. A high credit score will make it easier to get approved for mortgages, vehicle loans, and credit cards. As an added benefit, you’ll also pay a lower rate of interest. A low score will make it very difficult to get approved for any line of credit. Even if you do get approved, it will come at a higher cost.

Knowing what affects your credit score is the first step towards improving your score. It also helps to know how much of an impact each factor has on your total score.

#1. Payment History

Payment history has the biggest impact on your credit score. It makes up 35% of your total score.

Payment history refers to your record of paying off your debts. This includes your student loans, credit card bills, mortgage loans, and vehicle loans. Even one missed payment can pull your score down. The amount of damage it does depends on the number of missed payments and the extent of the delay. The longer you take to make that outstanding payment, the more it will hurt your score. Multiple missed payments can do considerable damage to your score.

Creditors report your payment activity to the major credit bureaus. Payment activity includes both, payments made as well as payments due that are still not settled. Your payment activity is reported to the major credit bureaus about once a month. On-time payments every month will keep adding a few points to your credit score consistently, slowly but surely improving the total. On the other hand, one missed payment will instantly shave a few points off your credit score. With every late payment, your score will be reduced by another few points, hurting your score even more.

How to use payment history to improve your score: Make sure that all debt payments are made by the deadline. If you have too many bills to keep track of or you tend to forget about deadlines, look for ways to ensure that all payments go out on time. Set digital or physical reminders. Or better still, set up auto-pay. This authorizes your bank to transfer the monthly payments from your account directly to the various creditors on specific dates.

#2.  Credit Utilization Ratio

Credit utilization ratio refers to the amount of debt you owe or your credit usage. This has the second biggest impact on your credit score, making up 30% of the total.

Credit utilization is calculated by dividing the total revolving credit you’re currently using by the total amount extended to you. It is indicated as a percentage. A low credit utilization ratio means you’re using only a small portion of the total credit available to you. This is a good sign and will help boost your score by a few points. The lower your credit usage, the better. Aim for credit utilization of less than 30% to improve your score.

How to use credit utilization to improve your credit score: Keeping your balances low is the best way to add points to your score. Paying off your credit cards twice a month instead of only once, can help to lower your credit utilization. This is especially useful if you tend to max your credit limit regularly. Another thing you can do is keep your older credit cards open. Keeping old credit cards open increases your available credit, which can help boost your score.

#3. Length of credit history

This looks at how long you’ve been handling credit and how well you’ve managed it. Length of credit history has the third biggest impact on your credit score, accounting for 15% of the total. The longer your credit history, the better for your credit score.

Lenders look at two things when it comes to age of credit accounts. One is the age of your oldest credit account. The second is the average age of your combined accounts. Why does this matter? A longer ho

How to use length of credit history to improve your credit score – Keeping your old credit accounts open will give you a longer credit history, which is good for your score. Avoid closing accounts even if you’re not using them, unless there’s a compelling reason to do so.

#4. Credit Mix

Credit mix refers to your portfolio of credit accounts. It makes up 10% of your score. Having a mix of revolving and installment credit accounts is viewed favorably and is good for your credit score. This is because a diverse portfolio offers a better picture of how well you manage different types of debt.  Of course, this only works in your favor if all payments are made on time.

So what exactly are revolving and installment credit accounts?

Revolving credit is a type of account that has a credit limit but no fixed term. Monthly payments fluctuate depending on how much credit you use. Credit cards are the most common type of revolving credit.

Installment credit works differently. You borrow a fixed amount and agree to make regular monthly payments till you’ve paid off the loan. Installment credit accounts are typically associated with all types of loans including student loans, mortgage, and vehicle loans.

How to use credit mix to improve your credit score – When it comes to credit mix, it’s important not to take on extra credit just to diversify your portfolio. If you’re already struggling to pay your student loans, adding a vehicle loan to the mix is a bad idea. On-time payments has a bigger impact on your credit score and should be given priority. A less diverse portfolio will not necessarily pull your score down on its own.

#5. New Credit Accounts

Hard inquiries make up 10% of your total credit score.

When you apply for a new line of credit, the lender will do a hard credit pull to review your credit report. Every hard inquiry will ding your credit score by a few points. Applying for multiple credit cards or loans will trigger too many inquiries, pulling your score down by several points. This can affect your ability to get approved for new credit.

How to use new credit accounts to improve your credit score – If you do need to take a loan or get a credit card, don’t apply directly. Most creditors have a pre-qualification process that requires a soft credit check. Soft credit checks allow you to determine whether or not you’ll qualify without hurting your credit score. Submit your loan or credit card application only after finalizing your creditor. This will trigger only one hard inquiry with minimal damage to your credit score.


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