What affects your credit score?
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“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.
BLUEPRINT
Published 5:29 p.m. UTC Dec. 4, 2023
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Your credit score plays an important role in your long-term financial success. We outline below what you should know about the factors that influence your credit score and how to use that knowledge to your advantage.
What affects your credit score?
Almost all of the information that has the ability to impact your credit score is found on your credit report. Credit scoring models, like FICO and VantageScore, organize the factors that influence your credit score into five main categories.
- Payment history: Whether you pay your bills on time impacts your credit score more than any other details on your credit report. Your payment history affects 35% of your FICO Score and 41% of your VantageScore 4.0 credit score. As a result, late payments have the potential to have a severe, negative impact on your credit score.
- Amounts owed: How you manage the balances on your credit obligations, especially your credit cards, can also have a significant impact on your credit score. Your credit utilization ratio — the percentage of your credit card limits in use — can have a meaningful influence over this area of your credit score. With FICO Scores, this category impacts 30% of your score. Meanwhile, credit utilization affects 20% of your VantageScore credit score.
- Length of credit history: Your age doesn’t matter where credit scores are concerned, but the age of your credit is another story. Credit scoring models consider the age of your oldest account, the age of your newest account and the average age of all of your credit obligations combined. These factors affect 15% of your FICO Score. The age of your credit accounts, along with other factors, also contributes to 20% of your VantageScore credit score.
- Credit mix: The types of accounts that show up on your credit report can also impact your credit score. Having a variety of different accounts (e.g., revolving credit cards or installment loans) tends to be better from a credit scoring perspective versus having a credit report with a single account type. Credit mix influences 10% of your FICO Score and it’s the other factor that contributes to the 20% category of your VantageScore credit score mentioned above (alongside your age of credit accounts).
- New credit: When a lender checks your credit report as part of an application for financing, a hard inquiry may show up on your credit report. Hard credit inquiries and new accounts on your credit report may impact your credit score in a negative way. These factors impact 10% of your FICO Score and 11% of your VantageScore credit score.
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How a credit score is determined
A credit score isn’t part of your credit report. It’s a separate, add-on product. When you apply for financing, like a loan or credit card, a lender may purchase a copy of one or more of your credit reports and add on a credit score to evaluate your risk as a borrower.
The job of a credit score is to forecast how likely you are to pay your bills on time in the future. Specifically, FICO and VantageScore credit scores will review the information on your credit report and analyze the probability that you’ll pay any credit obligation 90 days late or worse within the next 24 months.
It’s worth pointing out that your credit score is an analysis of your credit risk at a given point in time. However, anytime the details on your credit report change, your risk level may shift as well. The next time you or anyone else requests a copy of your credit score, the number may be different based on the information that appears on your credit report at that time.
When did credit scores start?
The first known credit score system can trace its roots back to the 1800s when the Mercantile Agency and Bradstreet Company merged to form the business credit reporting agency Dun & Bradstreet. However, it was a highly subjective credit scoring system used to evaluate commercial borrowers, not regular customers.
Fast forward to 1989 and a tech company called Fair, Isaac, and Company (today known as FICO) introduced the FICO® Score in partnership with Equifax, one of the major credit reporting agencies. By 1991, the FICO Score was available at all three credit bureaus.
The FICO Score became the first consumer credit score to standardize credit risk analysis among lenders throughout the country. By 1995, Fannie Mae and Freddie Mac recommended the use of FICO Scores for evaluating mortgage loans in the United States as well, making credit scores an essential part of the home-buying process for millions of Americans.
Why your credit score is important
A good credit score can communicate to lenders, insurance providers and others that you’re trustworthy and doing business with you is a wise investment. There are many benefits of earning a good credit score, including:
- It may be easier to qualify for loans, credit cards, leases and service contracts (e.g., mobile phones and utility accounts).
- You may receive offers for lower interest rates and fees from lenders.
- Insurance providers may offer you lower premiums.
- You may qualify for higher credit limits and larger loan amounts.
- Security deposit requirements from landlords and service providers may be smaller (or nonexistent).
FICO® Score vs. credit score: What’s the difference?
A credit score is a tool that lenders can use to assess risk. These three-digit numbers help lenders determine how likely an applicant is to repay credit obligations on time.
When you earn a higher score it indicates that you’re less likely to pay your credit obligations late. A lower credit score, however, may communicate that you’re a higher credit risk to lenders and others.
A FICO Score is a specific type of credit score. People often use the terms “credit score” and “FICO Score” as if they were interchangeable. However, there are some slight differences. Every FICO Score is a credit score, but not every credit score is a FICO Score.
Frequently asked questions (FAQs)
Most credit scores range from 300 to 850. On that scale, the lowest credit score you can have is 300 (not zero). However, if you have a FICO Score of 580 or below, a lender is likely to consider your credit score to be poor.
Bad credit scores could make it difficult to qualify for financing and other opportunities and could cause you to pay higher interest rates. So, it’s important to work to fix and repair bad credit if you find yourself in this situation.
Since most credit scores range from 300 to 850, the highest credit score you can typically earn is 850. In general, however, you don’t need to earn the perfect credit score to be eligible for the best offers from lenders.
According to the myFICO Loan Savings Calculator, the most affordable mortgage interest rates are available to those with a FICO Score of 760 or higher.
A credit score is a numerical representation of your credit risk based on your credit history. The three-digit number, typically between 300 and 850, is a tool that a lender can use to predict the likelihood of repayment when someone applies for new credit.
A higher credit score tells lenders and others that you’re more likely to repay as promised. A lower credit score, by comparison, communicates a higher level of risk.
There are numerous ways to check your credit score. Your credit card issuer might offer free monthly credit score access as a matter of customer service. (American Express, Capital One, Chase, Discover and other credit card companies extend this courtesy to cardholders on certain accounts). All three credit bureaus and myFICO.com also offer credit score access or credit monitoring services — either free or for a fee.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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