The components that affect your credit score

Your credit dominates your whole financial life but, unfortunately, many of us are not familiar with the credit scoring system until we’re ready to finance a new home or obtain a loan. Below, we’ll walk you through what affects your credit score, so you’re able to read your credit report like a pro and feel confident when applying for a new loan.

Let’s look at what affects your score:

1. Payment History – This category makes up 35% of your overall score and is typically the first thing a lender looks at. According to FICO, there are 7 components that make up your payment history:

   • Payment information on credit cards, retail accounts, installment loans, mortgages and other types of accounts. 

   • How far overdue delinquent payments are currently or may have become in the past. 

   • The amount of money still owed on delinquent accounts or collection items d. The number of past due items on a credit report.

   • Adverse public records (e.g., bankruptcies)  

   • The amount of time that's passed since delinquencies, adverse public records or collection items were introduced.

   • The number of accounts that are being paid as agreed.

2. Credit Utilization – In a simple sentence, credit utilization is essentially how much credit you’ve used in relation to how much credit you’re given. Credit utilization accounts for about 30% of your credit score. Now you may be wondering how the balance of your credit cards affects your overall score. Well, every month, your credit card issuers report your balance, typically on the last day of the month, to the three large credit bureaus (TransUnion, Equifax and Experian). Your balance information will be reflected in your credit score. A general rule to follow is keep your utilization at 30% or less. For example, if you have a credit card limit of $1,000, try to charge no more than $300. Keeping a low balance shows that you are managing your credit cards responsibly and, in turn, won’t have a negative effect on your credit score.

3. Credit History and Age – This accounts for 15% of your score. In short, your credit age is the amount of time you’ve established credit history. According to FICO, the factors that affect your credit history include:

   • The age of your oldest account, the age of your newest account and the average age of all your accounts. 

   • How long specific credit accounts have been open. 

   • How long it has been since the account has been used.

   • Of course, not only will a longer credit history will impact your overall credit score in a positive way but this will show potential lenders that you’ve used credit before.

4. Credit Inquiries – This is the smallest component at 10% yet it is still something you should be mindful of. On your credit report you will see two types of inquiries. “Hard” inquiries and “soft” inquiries. When it comes to your credit score, hard inquiries are what you need to watch out for. While making one or two hard inquiries may not impact your credit score significantly, multiple hard inquiries show creditors that you may be chasing credit and might not be as responsible with your finances. With each hard inquiry you make, you may be costing your credit score up to 5 points. In short, keep your hard inquiries to a minimum so it does not affect your credit score too drastically. Examples of a hard inquiry are:  

   • Applying for a credit card or loans such as student loans, personal loans, etc. 

   • A credit check when renting a new apartment

5. Credit Mix – This makes up the final 10% of your credit score. Your credit mix includes different types of credit lines you may have, such as credit cards, auto loans, student loans, a mortgage, etc. Creditors and lenders like to see that you have a variety of credit and are able to manage it appropriately and responsibly.

The bottom line is, while many factors can affect your credit score, as long as you are responsible with your credit, you should be in the clear.

If you are currently struggling with a lower credit score or would like to build your credit score, we offer a Credit Builder CD Loan to help you build or rebuild credit. To learn more click here.