What Affects Your Credit Score?


If you’re like most consumers, you know how important your credit score is – but you probably have little to no idea what affects your credit score. Maybe you know that your credit score is based on how well you pay on your debts and while that’s certainly important, it’s just part of a bigger picture. Knowing what else affects your score can put you on the fast track to great credit.

Payment history

Payment history is the most important factor that affects your credit, accounting for 35 percent of your score. It includes all the payments you’ve made on the various types of credit you have, like credit cards, installment loans or mortgage loans. Negative account information like public records, tax liens, late payments, collection accounts and foreclosures also fall under this umbrella.

The kinds of payment items that affect your credit score include:

  • Accounts that are listed as “paid as agreed”
  • Delinquent accounts
  • The severity of delinquent payments
  • How recently delinquent payments occurred

Unpaid medical bills are a common credit trap you don’t want to fall into. It can take weeks or even months for the insurance company to settle up with your health care provider but in the meantime the bill’s just sitting there. At some point, your doctor may hand it over to a collection agency and if that happens it’s going to tank your credit score as long as it remains unpaid. Paying the bill off and getting reimbursed by your insurance is a pain, but it won’t hurt your credit.

One other scenario that can cause problems involves debt settlement companies. These companies work with borrowers to help them settle their credit card debts for less when they can’t pay in full. The catch is that the debt settlement company will tell you to stop paying your credit card bills while they try to negotiate a deal with your creditors. You might be able to get out of paying the whole balance by the time it’s said and done, but you’re going to pay a bigger price in terms of how all those late payments hurt your credit score.

Amounts owed vs. Available credit

After payment history, the second most important factor affecting your credit score is how much you owe. It’s a common misconception that the more credit you use, the better your score. While a long payment history is good, using up a lot of your credit line can work against you. Ideally, you should stick to using 30 percent of your available credit or less to keep your score in a healthy range.

Length of credit history

The age of your credit accounts also has an impact on your score. The older your accounts, are the less likely lenders are to see you as a credit risk. A longer credit history generally means a higher score as long as you’ve been using your accounts wisely.

Number of inquiries on your credit

Every time you apply for a new credit card or loan, it shows up on your credit report. This is called a hard inquiry. A single inquiry won’t necessarily hurt you, but multiple inquiries in a short time span could indicate that you’ve been denied credit and might be getting desperate. Not only that, but every time there’s a new hard inquiry on your credit it knocks a couple of points off your score.

One of the biggest things people tend to get wrong about credit is the idea that checking your own score or report has the same impact as a lender inquiry. Any time you take a peek at your credit, either through a service like Credit Sesame or through AnnualCreditReport.com, it counts as a soft pull, which doesn’t impact your score.

Soft inquiries can also occur when someone checks your credit for a purpose other than loan or credit approval. For example, your insurance company might do a soft pull when deciding what rates you qualify for. Employers may check your credit as part of the hiring process but it wouldn’t show up on your report.

Hard inquiries will stay on your credit report for 24 months, but will be calculated within your score for only 12 months. Soft inquiries have no effect whatsoever so there’s no risk of hurting your score when your pull your report. In fact, it’s a good idea to check your own credit regularly to keep an eye out for errors, inaccuracies or potential signs of fraud.

Types of credit used

The types of credit you use is also an important factor in your credit score. The FICO score likes to see a variety of credit: a healthy mix of credit cards and installment loans. This way, lenders know that you’re well-versed in managing different types of credit accounts.

Monitor your credit score for free

You can keep track of your credit report and score with CreditSesame.com. Get your truly free credit score monthly – no credit card required, or trial periods. While you’re at it, find out how much you can save with refinance, low interest credit or loan option with Credit Sesame’s debt analysis tools.