The Factors That Impact Your Credit Score

Paying off your credit card balance in full and on time accounts for 35% of your credit score. If you miss even one payment, your credit score can be negatively impacted. If your account is sent to collections, or you go into bankruptcy, the consequences will likely last longer and be more severe than simply missing a payment.

Credit utilization is the amount of available credit you use on your credit cards and other revolving lines of credit. It accounts for 30% of your credit score. For example, say that you had a credit limit of $10,000 and currently owed $1,000 on a card. Your credit utilization would be 10%.

This is found by dividing the outstanding balance of $1,000 by the credit limit of $10,000 and then multiplying by 100 to express it as a percentage.

As the name implies, the length of your credit history is simply how long you have used credit for and accounts for 15% of your score. In general, the longer you have responsibly used credit, the higher your score will be. The age of your oldest account, the age of your newest account, and the average age of all of your accounts are taken into account when calculating this factor.

Your credit mix accounts for the different types of credit you have and accounts for 10% of your credit score. In general, having a mix of different types of credit can positively benefit your credit score. For example, you might have installment debt (mortgages, car loans) and revolving debt (credit cards). If you can manage both responsibly, your credit score will likely improve.

Applying for new lines of credit through a hard inquiry can negatively impact your credit score. A hard inquiry appears on your credit history when a lender receives an application from you. For example, if you apply to get financing for a new car purchase, it will show up on your credit report as a hard inquiry.

In the short term, inquiries may reduce your credit score, but will likely bounce back once you show you can responsibly manage the new line of credit. Multiple hard inquiries may be lumped together and treated as one hard inquiry if they occur in a short period of time such as a few weeks.

This can occur if you are rate shopping for mortgages or car loans for example. Credit inquiries make up a small percentage of your total credit score at 10%.

The easiest action you can take is to pay off your credit cards on time. This will have the largest impact on your credit score. If you struggle to make payments, consider setting up automatic payments and create reminders for yourself.

Payments more than 30 days old that you pay off will stay on your credit report for 7 years. However, if you consistently stick to paying off your lines of credit, your score will gradually increase over time so stick with it.

A lower credit utilization will typically boost your credit score. For example, if your current credit utilization is 50% and you decrease it to 20%, your score will likely increase in a matter of months. You can consider making multiple payments a month to keep your utilization low or making payments before your monthly statement date.

A general rule of thumb is to keep your utilization below 30%, but if you are lower than this number your score may reflect that. It is more likely that you will be able to keep up with payments if your credit utilization is lower which is why it can improve your credit score.  

If you have an old credit card that you no longer use, it can be tempting to simply close out the account. However, since your credit history makes up 15% of your credit score, keeping old accounts open can help boost your credit history score.

You can consider putting small purchases on an old card to keep it active or contact your credit card issuer to see if you could upgrade or downgrade the card to one that is a better fit for you. This may allow you to keep the credit history of that card.  

You do not want your credit score to show a laundry list of hard credit inquiries. This can make you look irresponsible and negatively impact your credit score. Only apply for new lines of credit when absolutely necessary and check to see if prequalification is an option to potentially avoid a hard credit inquiry.

Your credit score does matter to a certain extent. More than anything, your credit score tells lenders how likely it is you will pay them back. The higher your credit score, the better deals you tend to get on mortgages, car loans, and more which can help improve your overall financial picture.

The ability to access capital at affordable interest rates can be a huge help to your finances. Keep in mind that your credit score is not the end all be all. You still need to have a budget, do a good job at work, invest for your future, and more than anything be responsible as credit cards are the death of some individuals.  

Yes, you can succeed financially without a credit score. Many individuals opt to live a debt free lifestyle and avoid credit cards altogether. This is not unreasonable as many Americans go into credit card debt which is a struggle to get out of due to the high interest rates that credit cards charge.

If you opt to not build a credit score, you can still succeed financially. You can focus on the behaviors of financial success such as living on a budget, having good insurance coverage, and investing for your future self through things like a 401k or Roth IRA.

Keep in mind that not having a credit card can make accessing capital more challenging. For example, if you do not have a credit score and are applying for a mortgage, you may have to go through manual underwriting which can be a lengthy process and some lenders may charge higher interest rates.

The point here is that there are pros and cons of having and not having a credit score. If you do not have a credit score, you eliminate the risk of credit card debt, but may have more trouble obtaining financing when needed.

If you do have a credit score, you run the risk of credit card debt and must behave responsibly to maintain your credit score, but you often can get access to capital at good rates when needed with a good credit score.