What Affects Your Credit Score?

Kevin Claypool, Client Portfolio Manager, First Republic Bank
December 30, 2021

  • Five key factors affect your credit score: Your payment history, your credit utilization ratio, the length of your credit history, the types of credit you have in your name and the number of times you’ve applied for new credit.
  • Numerous factors do not affect your credit score, such as your income, checking credit scores and on-time bill payments.
  • Maintaining a strong credit score can open up options for the type of credit you can access and affect the rates you get on financing products.

The importance of credit scores is commonly acknowledged by both individuals and financial institutions, but not everyone is aware of what impacts a credit score and what doesn’t. It is important to learn what factors affect a credit score to help you build a better score and maintain it. Knowing what affects your credit score may help you earn better rates on borrowed money, which also helps you save money in the long run.

Credit scores at a glance

Credit scores chiefly help lenders and financial institutions evaluate your creditworthiness and your history with debt management and repayment. There are different credit scoring companies (such as FICO and VantageScore), and each brand tends to provide different credit scores based on their unique credit scoring models.

Things that impact your credit score

Five key credit score factors directly impact your score, and each factor must be managed wisely in order to achieve and maintain a good credit score.

Your payment history

Payment history is typically one of the most influential credit scoring factors. Frequently missed or late monthly payments generally suggest the candidate is a risky borrower for the financial institution issuing credit.

Payments at least 30 days late on financing products such as credit cards and installment loans can hurt your credit score quite significantly (missing payments but submitting them before 30 days pass, on the other hand, generally shouldn’t hurt your credit). Conversely, a long stretch of on-time payments will contribute positively to your score.

In good news, late payments are typically removed from your credit reports — which means they can no longer hurt your credit score — after seven years.

In addition to missed payments for credit cards and installment loans, actions like foreclosures and bankruptcies can also wreak havoc on your credit, since they’re effectively a sign that you’re defaulting on more than one payment. Fortunately, as with individual missed payments, foreclosures and Chapter 13 bankruptcies are removed from your credit reports after seven years and Chapter 7 bankruptcies, after 10 years.

The size of your balances

Higher revolving credit card balances can decrease your credit score. This concept is typically known as “credit utilization” or “credit usage” (your total amounts owed vs. your total available credit). Although a lower credit utilization ratio is generally better, there’s no hard-and-fast rule for ideal utilization. Credit bureaus generally recommend utilization below 30% for best scoring results — a ratio like 10% is even better.

The age of your credit accounts

The longer your credit history, the better your credit score. This is why many credit experts recommend keeping credit cards open even if you pay them off and rarely use them (this strategy also positively affects your credit utilization ratio). Opening newer accounts will shorten the average age of your accounts, which may hurt your credit score, though not significantly.

The types of credit you have in your name

The ability to properly manage several types of credit is another positive indicator for lenders looking at your history of managing credit and is therefore factored into credit scoring formulas.

Your credit mix isn’t a major factor in most credit scoring models, but having various types of accounts in your name (credit cards, a car loan, other personal loans, a mortgage, etc.) can help boost your credit scores in some instances.

Applications for new credit

Before applying for new credit, make sure you know the difference between hard/soft inquiries. Applying for credit can cause your credit score to fall, though typically only by a few points, if at all. Such credit checks, known as hard inquiries, are generally removed from your credit reports after two years.

Hard inquiries, or hard credit checks, are different from soft credit checks; the former impacts your credit score, while the latter doesn’t. To open an account and obtain credit, financial institutions generally perform hard inquiries; on the other hand, they often perform soft inquiries when they’re looking to see if you’re qualified for credit.

Certain types of credit inquiries (such as to procure mortgages or auto loans) are bundled together if they’re all done within a certain time frame, which is to your advantage when you’re rate shopping.

Things that don’t impact your credit score

There are plenty of activities that might be related to credit — or seem like they are — that nevertheless don’t impact your score.

Using your debit cards

There can be some confusion around credit scores when using your debit card. Debit card transactions will not impact your credit whatsoever, even if you choose “credit” at the point of sale (choosing “credit” simply changes how the payment is processed). Ultimately, you are still drawing directly from funds you already have in your bank account instead of using borrowed money.

Your income

Income plays a fundamental role in determining whether a credit applicant is approved or denied. However, your income doesn’t impact credit scores directly.

Income can have a loose, indirect impact on your credit scores, such as impacting your credit limits; for example, a higher income may enable you to request a higher credit limit. This could, in turn, reduce your credit utilization and boost your credit scores. Losing income can also impact your ability to pay your bills.

Importantly, however, income never impacts credit scores directly, regardless of whether it changes.

Checking credit scores or reports

You’re free to access both your credit reports and any credit scores at your leisure without impacting your credit scores, whether you’re viewing reports directly from the credit bureaus (Equifax, Experian and TransUnion) or using a third-party credit score service.

Most public records

Judgments and tax liens used to appear on credit reports and could serve as a significant red flag when applying for credit. However, they are no longer allowed to be reported on credit reports so they do not affect your credit score.

Paying utility bills on time

Although some newer credit scoring variations, like Experian Boost, factor utility bills into building your credit score, your on-time bill payments don’t typically impact the scores lenders see. Importantly, however, late utility bills sent to collections will often appear on your credit reports and will damage your score accordingly.

Choose the right lender for you

Managing credit wisely is important. One of the first steps is learning what factors affect a credit score so you can build a good score and maintain it. A good score can not only open up different types of credit options to you, but with some financial institutions it can also allow you to receive preferential rates.

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