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Finance | 5 Major Factors That Affect Your Credit Score

5 Major Factors That Affect Your Credit Score

Factors That Affect Your Credit Score

Who among us doesn't want a good credit score? A credit score tells various kinds of money lenders about the financial health of a person to various kinds of money lenders including insurance companies, mortgage lenders, and loan givers. We can state that affect your credit score is the only factor used to determine your financial worthiness, including whether you can repay the loan and how risky it is to grant you a loan. 

Knowing its importance, the first question that comes to mind is, How can we enhance our credit score? In order to major in any field, you first need to learn how the area works. The same principle applies in the financial world. Knowing what factors have a bigger impact on the credit score will provide us with knowledge about what affects your credit score and how we can improve it.

In this blog, we will try to provide you with a thorough understanding of the things that affect credit scores. We will navigate through the five major factors that significantly impact your credit health. Not only do we understand what affects credit score but we have also tried to provide you with actionable insights that will help you maintain a healthy credit score.

Right from the basics of what a credit score is to the more advanced stages, everything is covered downward, so why waste time? Without wasting any further time, let's delve right into the world of credit.

What is a Credit Score? 

A credit score is a three-digit number that various financial institutions assign based on certain predefined factors that show your creditworthiness to them. The most commonly used credit score is the FICO score, and at number two comes the VantageScore. Almost all financial institutions check your credit score to assess your financial credibility before providing you with any kind of financial help.

You need to have a good credit score on a scale of 300 to 850. All these scoring systems somewhat differ in their approach to calculating credit scores, but there are some basic factors that affect credit scores in every single credit score system.

These principal factors are what we are interested in. Once you get a thorough understanding of the things that affect the credit score, we will look forward to actionable steps to enhance it.

Important Variables that Influence Your Credit Score:

 1. Payment History

Payment history is the record of all your past payments in which you repaid your loans. The most basic factor that defines anyone's lifestyle and financial health is their payment history. When you have a history of on-time payments and larger transactions, the lender will automatically assume that you are trustworthy because your post-credit history is good. Predicting your future based on your past habits has always been a great tool. That's the reason why your payment history contributed approximately 35% to calculate your credit score. A consistent record of on-time payments can be very fruitful, as it indicates your reliability. 


The following elements are taken into account for this part of your score.

  • On-time payments contribute the most to your payment history. If you are continuously paying your bills late, then this can affect your credit score drastically because it is indicating to the lender that you are not very trustworthy.
  • Sometimes, due to emergencies or forgetfulness, we forget to pay bills on time. These are human mistakes that can be neglected because you weren't intentionally delaying your bills. To avoid such errors degrading your credit score, financial institutions started to look further into how much time you are taking to pay back the debts. If you have forgotten your bills, then within a few days you will pay them back. So whether you have paid back late or how late it took also counts.
  • Apart from these two factors, payment history also depends on whether or not any of your accounts have been sent to collections. If it has happened in the past, then there is a high probability that it can happen in the future as well. 
  • Whether or not you have gone bankrupt in the past is another major issue. If you have any history of lawsuits or bankruptcy, then you are potentially dangerous to the money lender's institutions.
  • No one is perfect. Everyone makes some mistakes, and from time to time, people change. In the world of credit, someone may have negative events in his credit history, but what really matters is how frequently these negative impacts are happening. Therefore, companies check your current status and how clean you have been in the recent past.

Late payments and defaults are the destroyers of your credit score.

To maintain a positive payment history, always pay your bills on time, set up reminders, and enroll in autopay where possible. If you encounter financial difficulties, communicate with your creditors to explore payment options and avoid negative consequences for your credit.

What You Should Do

  • You can set up an autopayment option so that your bills will be paid directly from your bank account. If you are a little unsure about it, then you can prefer payment reminders from the bank.
  • If you are going through tough times, you can explain these to your creditors and talk about the options that are available.
  • Paying on time is the most important thing that affects your credit score. Be consistent with your payments to establish a solid payment history.

How Much Time Will It Take?

It will take some time to see visible results because your past payment history cannot be changed easily. Stick to paying your bills on time, and it will affect your credit score in a time frame of 6 to 12 months.

2. Credit Utilisation

The next point on the list of what affects our credit score is credit utilization. From the banks, we are provided with a credit limit that is much higher, and in reality, we don't need such a high amount of money. But most of us spend it carelessly and find ourselves in the trap of debt. Using your credit limit wisely can quickly improve your credit health. All kinds of installment loans that you take, like personal loans, student loans, or mortgages, are counted in your credit score calculation. 

But another factor is even more important than the debts you owe, which is termed the credit utilization rate. Simply put, it is the ratio of the total debt that you owe with respect to the credit limit that you have. The lesser this ratio is, the more it's good for you. In ideal conditions, it is advised that you use less than 30 per cent of your credit limit. If you have different accounts, having a higher balance on any one of them will decrease your overall credit score. Thus, we recommend paying attention to not just your overall credit utilization but the utilization of each account separately.  To summarize, keep the following points in mind because these are the things that affect your credit score.

  • Keep your credit utilization ratio low, lenders will be more inclined to give you loans if your credit utilization percentage is lower.
  • The amount that you owe to different financial institutions for mortgages, loans, or credit cards has a negative impact on getting more debt.
  • The money you still owe on different kinds of accounts, such as a mortgage, an auto loan, a credit card, and an installment account, also affects your credit score, as the software used to calculate credit scores prefers to see that you carefully manage a variety of credit products.

What You Should Do

-  Firstly you should try to reduce your previous credit card debts and, from that day on, start paying your bills on time each month. These steps will reduce your credit utilization ratio.

- You can request an increase in the limit of your credit cards. These will help further lower your credit utilization ratio.

- Don't close your credit card accounts; it can affect your overall credit utilization.

 Be cautious when closing credit cards, as it can affect your overall credit utilization.

How Much Time Will It Take?

On the list of things that affect credit scores, the factor of credit utilization is the least time-consuming. Here, you can improve your credit score quickly if you continue paying your balances on time. Within a few months of reducing your credit card balance, improvements will become visible. 

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 3. Length of Credit History

In your query of what factor has the biggest impact on a credit score, the length of your credit score comes in at the third number. The older your account is, the better it is for your credit score. Your credit score is 15 percent based on the length of your credit history. It consists of various elements that affect your credit history. It includes:

  • Your oldest account's age
  • Your newest account's age
  • The average account age you have
  • Whether you recently utilized an account

In comparison to the other factors, this one is significantly less important to credit scores. One of the reasons for this lower value is that other borrowers who have a short history can have better statistics about on-time payments than you do because your account is old and late payment occurrences have happened earlier. Becoming an authorized user on an old account can help you improve your statistics with the help of excellent payment records. 

What You Should Do

- Try becoming an authorized user on the account of a person whose credit history is strong. These will improve your credit score, which is one of the most important things that affect your credit score.

- Do not close your old accounts, the older your account becomes, the more it increases the chances for improvement in your credit score.

- Try to use your credit accounts maturely by avoiding the excessive use of credit loans. 

How Much Time Will It Take?

Depending on the length of your credit history and how well you have managed your accounts, it can take anywhere from 6 months to a year to see positive results.

 4. Credit Mix and types 

Borrowing a mix of different types of credit, like credit cards, student loans, installment loans, etc., can help build your credit score. The FICO score system gives a weight of 10 percent to this factor. But we would suggest that solely based on this factor, you should not take out different loans and pay the interest rate just to improve your credit rating. Keep in mind that this is a minor factor, accounting for only 10 percent.

No need to worry if you don't have various accounts opened in these different categories. The only thing these factors signify is your ability to handle different types of credit responsibly. 

What You Should Do

- Do not open unnecessary credit accounts just to showcase your handling abilities.

- Try having a mix of credit types in your portfolio, but without responsible management, avoid it at all costs.

- Regularly reviewing your credit report can help you make the right decisions regarding credit mix, and it will also help in cross-checking any discrepancies in your credit report.

How Much Time Will It Take?

It is a long process to balance your credit mix, but the response of this factor on your credit report is even longer. You can assume that the positive effects will be seen over a period of months from the day you start managing your credit mix.

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5.  New credit 

The FICO score considers the number of accounts that you own. All your recently opened accounts and the time when you opened your last credit account all such factors are considered in calculating your credit score. Currently, applications for new credit constitute approximately 10 percent.

Let's understand how it happens. Whenever you open a new credit line, hard inquiries are made on your credit, this process involves a systematic review of your credit information. These hard inquiries result in a temporary decline in your credit score. To minimize the impact of new credit applications on your credit score, you need to strategize your decision regarding your credit applications.

Try to minimize credit inquiries in a short time period and apply for new credit only when it becomes necessary. Apart from this, you can also check details about your lender, such as whether they perform hard inquiries or soft inquiries during the pre-approval process.

What You Should Do

- Don't apply for multiple credit accounts at one time.

- Try researching different lenders and their inquiry techniques before applying for credit accounts.

How Much Time Will It Take?

Hard inquiries don't affect your credit score in the long term, their impact is short-term. It takes almost two years to completely neglect the effects of hard inquiries, but the effect starts diminishing in a short amount of time when you use your credit accounts responsibly.



Credit scoring organizations examine your credit reports to determine how you rank on each of these criteria. They then calculate your scores based on that data. By looking at your credit reports, you can see the same information that they see. Because they have the most impact on your scores, pay your bills on time and maintain low balances in comparison to your credit limits as you work to develop your credit. You might have better credit overall if you concentrate on enhancing these aspects.

Frequently Asked Questions

Q.1 Which credit score systems do lenders use the most?

The two most popular credit score systems in the USA are the FICO score system and the Vantage score system. These systems are used by money lenders all over the USA.

Q.2 What score can I consider a good score in the FICO score system?

In the FICO score system, the score ranges from 300 to 850, and a score ranging from 670 to 739 is described as a good score.

Q.3 Which subjects didn't have any impact on the calculation of the FICO score?

According to FICO, the following details are not taken into account when calculating your credit score:
1. Your marital status
2. Although FICO claims that some other sorts of scores may take into account, age, race, ethnicity, religion, and country of origin.
3. Public support received
4. Salary
5. Employment history, employer, and profession (although lenders and other scores may take these factors into account)
6. Your residence
7. Family and child support responsibilities
everything not included in your credit report taking part in a program for credit counseling.