What Factors Influence Your Credit Score?

When a potential landlord pulls your credit report as part of the application process, or when you apply for a loan for a car or a credit card, the credit bureau also provides your credit score so the lender can assess your financial situation.

Understanding How Your Credit Score Is Affected

Knowing your score is the first piece of information you need to make sound financial decisions, but understanding how that score is calculated and how your financial behavior affects your score is the key to taking control of your financial health.

The significance of understanding what factors influence your credit score

When you understand what factors influence your credit score, you can make better decisions to improve it.

The chart below shows that the majority of Americans have credit problems. So, for many people, there is room for improvement—and understanding how the decisions you make can help or hurt your score is a good place to start.

The Five FICO Credit Score Ranges Categorized the US Population

What factors affect your credit score?

The best way to develop a strategy to maintain or improve your credit score is to understand what’s in your credit report, as well as what – and how – this information affects your credit score.

Your credit report contains four types of information: identifying information (name, address, Social Security number, date of birth, and employment); “tradelines” or lines of credit (car loan, mortgage, credit cards, store cards), including your credit limit and payment history; credit inquiries (which lenders have requested your credit report); and public records or collections (court records, overdue debts, bankruptcies and civil lawsuits).

Each of these factors is given a weighting in order to produce your credit score.
To begin improving your credit score, you must first understand what is currently on your credit report. Americans are legally entitled to one copy of their credit report from each of the three credit bureaus each year. Members of Credit Sesame can access their score, which is updated monthly, by creating a free account.

Here are some examples of financial events that can have a positive or negative impact on your credit score.

Investigating Negative Credit Factors and the Average Credit Score Drop

Is it true that canceling a credit card has an impact on your credit score?

Closing a credit card can have an effect on two important credit factors: credit utilization and average age of credit accounts. If you’re trying to improve your credit, you may be tempted to close a credit card after you pay off the debt — after all, it’s less debt, right? This would actually lower your score.

Your credit utilization is the proportion of available credit to credit used. For example, if you have a $5,000 credit line and have charged $2,000, your credit utilization ratio is 40%. When you close a credit card, your available credit decreases, which can lower your credit score. It is preferable to keep the card open and maintain a balance of less than 30% of the available credit. If you don’t think you can trust yourself not to use the card after you pay it off, closing it won’t immediately remove it from your credit report. A credit card that has been closed will remain on your credit report for seven years.

Similarly, if you’ve had the card for a long time, it can have a negative impact on the age of your credit, lowering your score.

If you recall, most people consider good credit utilization to be less than 30% of available credit, which accounts for 30% of your overall credit score. The average credit score of Credit Sesame members with good utilization is 646. However, when members increase their utilization to more than 30%, their credit score drops to 598.

Keep in mind that the age of your credit lines accounts for 15% of your credit score. The chart below shows that Credit Sesame members with an average account age of 11 years or more have higher scores than those with an average credit age of five to ten years.

Is it true that checking your credit affects your credit score?

There are two types of credit pulls: soft pulls or inquiries and hard pulls. A soft pull has no effect on your score. A soft pull occurs when you look at your own credit report. Another example of a soft pull is a background check performed by an employer.

A hard pull occurs when a lender requests your full credit report in response to your credit application. This is how they decide whether or not to extend credit to you. Hard pulls have a small impact on your credit score. Furthermore, these hard pulls remain on your report for two years but are only considered in your score for one year.

The number of inquiries on your credit report accounts for 10% of your credit score. The chart below shows that having a lot of inquiries lowers your credit score.

When looking for a mortgage, car, or student loan, the inquiry impact does not apply. Multiple inquiries for the same product in a short period of time are treated as one inquiry by credit bureaus.

Do late payments have an impact on your credit score?

The quick answer is yes. Making late payments is the quickest way to destroy your credit score. Late payments are weighted differently based on their lateness. A payment that is 120 days late, for example, is worse than one that is 30 days late. Recovery from a single missed payment can take more than a year.

Payment history accounts for 35% of your credit score, making it the most important factor in determining your credit score. The average credit score of Credit Sesame members with a good payment history is 646. A poor payment history, on the other hand, lowers the average credit score to 598.

What has no bearing on your credit score?

You may be wondering, what doesn’t affect my credit score. Fortunately, there are a few items that have no bearing on your final score. These are some examples:

  • Gender, marital status, ethnicity, race, age, religion, nationality, and color are all factors to consider.
  • Salary
  • Obligations to pay child support
    vocation or title
  • Employer or employment history
  • Where do you live?
  • Your possessions

Advantages of Understanding What Influences Your Credit Score

When you take the time to learn about what factors influence your credit score, you’re taking the first steps toward better financial control. Your credit score is much more than a number; it can be viewed as a living, breathing entity. It is constantly changing, reacting to the ever-changing information in your credit report, and it must be tended to and cared for.

Your credit score and credit health have a huge impact on your daily life in ways you may not even realize. A lower credit score will undoubtedly cost you a significant amount of money in additional fees and interest charges. A lower score, on the other hand, can cause you to pay more for car insurance in some states, miss out on an apartment you’ve been eyeing, or even be rejected for your dream job. Understanding what influences your score will help you determine what steps to take to monitor and improve your score.

Conclusion and synopsis

Whether you want to learn more about how your credit score works or you want to improve your credit, knowing what affects your credit score is a good place to start. Understanding what factors affect your credit score and the effects these factors have allows you to better diagnose what steps to take to either maintain or improve your score—and make wise financial decisions.