Accounting for 35 percent of your credit score, payment history is the number one factor affecting your credit standing. A single missed payment could lower your credit score by 60, 80 or 100 points, depending on the date of the late payment and your current credit score. Generally speaking, higher scores are hit harder by late payments than lower scores and older late payments have less impact than recent ones.
If you want great credit, you must pay all of your bills on time — that’s a given. However, excellent payment history alone will not give you the credit score you desire. You must also pay attention to the factors that make up the remaining 65 percent of your credit score.
5 Factors That Influence Your Credit Score
Credit scoring models look at a variety of factors when calculating your score, including payment history, credit card utilization, length of credit history, mix of credit and inquiries.
1. Credit Card Usage
With the exception of payment history, credit card utilization impacts your credit score more than any other factor. A whopping 30 percent of your credit score depends on it. Your utilization score represents the percentage of revolving debt you have in comparison to the total amount of revolving credit available to you. Most revolving credit comes in the form of credit cards, but it can also include any other type of revolving credit, such as a revolving loan.
Ideally, your credit card utilization should be 30 percent or less. For example, if you have $5,000 in revolving credit, your total balances should add up to no more than $1,500. To find out your utilization percentage, divide your total balance by your total credit then multiply the answer by 100.
2. Length of Credit History
The length of your credit history accounts for 15 percent of your credit score. To calculate your length of history, credit scoring models determine the average age of all credit accounts listed on your credit report. Closed accounts that have fallen off of your credit report are not considered.
When it comes to credit history, there is no magical number you should strive for. However, the longer history you have, the better.
3. Mix of Credit
Accounting for 10 percent of your credit score, your mix of credit depends on the types of credit accounts listed on your credit report. A diverse mix that includes installment loans, revolving credit and secured credit is best. The following is a brief explanation of each type of credit.
- Installment loans: Personal loans, student loans, furniture loans
- Revolving credit: Credit cards, retail credit cards, gas cards
- Secured credit: Auto loans, home loans, equipment loans
For the best possible score, maintain a mix of credit accounts but don’t go overboard. A single installment loan combined with two credit card accounts and an auto loan is sufficient to show how you manage different types of credit.
4. Hard Credit Inquiries
There are two main types of credit inquiries: soft and hard. Soft inquiries are initiated without your knowledge by companies screening you for pre-approved offers. They do not affect your credit score.
Hard inquiries, however, account for the remaining 10 percent of your credit score. Hard inquiries include any and all credit applications initiated by you or by a lender on your behalf. Scoring models look at two factors when considering hard inquiries: the number of inquiries present and the date they were initiated. Older inquiries carry less weight than newer ones.
5. Multiple New Accounts
Too many new accounts can lower your score by decreasing your length of credit history and increasing the number of hard inquiries appearing on your credit report. For this reason, you should avoid opening multiple accounts within a short amount of time. Strive to wait at least six months between credit applications.
How to Improve Your Credit Score
To improve your credit score, take steps to address and optimize all of the factors affecting your credit score. The following tips will help you.
Improve Payment History
Do this by making all payments on time. If you have late payments listed on your credit report, contact the lender to see if there is a remedy. You may be able to restructure your loan or set up a payment arrangement in exchange for the removal of the delinquency from your report. This only works if your account is not currently in collections.
Lower Credit Card Utilization
Do this by paying down your credit card balances or asking for a credit limit increase on one or more of your revolving accounts. Remember, balances should account for no more than 30 percent of your available credit.
Increase Length of Credit History
This can be accomplished by being patient and letting your credit profile age. Avoid obtaining new credit, as this will shorten the average length of your credit history. Also, consider leaving older accounts open even if you’re not using them.
Diversify Mix of Credit
You can do this by obtaining new types of credit. If you have two or more credit cards, do not apply for more revolving credit. Instead, consider taking out a personal loan.
Decrease Hard Credit Inquiries
Do this by spacing out your credit applications. Only apply for credit if it’s absolutely necessary. Note: multiple inquiries for a car loan or mortgage are often grouped together and only considered as one inquiry, provided they occur within a reasonable time frame.
Credit scoring models are complicated and mysterious on purpose. Credit agencies do not want you to know or understand the exact formula they use to calculate your credit score. However, they offer enough transparency for you to optimize your credit profile in an effort to earn the best possible score. If you learn all you can and take steps to improve your credit profile, you will see your score improve over time.