(We Create Results! Restore your Financial Confidence With Our Expert Consulting Services.)

Understanding the 5 Key Factors Impacting Your Credit Score

June 15, 2024

Your credit score is a numerical representation of your creditworthiness and plays a significant role in your financial life. Lenders use your credit score to determine whether to approve you for credit cards, loans, mortgages, and other financial products, as well as the terms and interest rates you’ll receive. Understanding the key factors influencing your credit score is essential for maintaining and improving your credit health. In this blog post, we’ll explore the five primary factors that impact your credit score and discuss how you can manage them effectively.

1. Payment History

Your payment history is the most critical factor influencing your credit score, accounting for approximately 35% of your FICO score—the most widely used credit scoring model. Lenders want to see a history of on-time payments, as missed or late payments can significantly lower your score. Consistently paying your bills on time demonstrates financial responsibility and reliability to lenders.

2. Credit Utilization Ratio

Credit utilization ratio refers to the amount of credit you use compared to your total available credit. It accounts for approximately 30% of your FICO score. To calculate your credit utilization ratio, divide your total credit card balances by your total credit card limits and multiply by 100. Keeping your credit utilization ratio low—ideally below 30%—can positively impact your credit score. High credit utilization suggests to lenders that you may be overextended and could be a higher risk.

3. Length of Credit History

The length of your credit history contributes around 15% to your FICO score. Lenders prefer to see a longer credit history, as it provides more data on your borrowing behaviour. Your credit history includes the age of your oldest account, the average age of your accounts, and the age of your newest account. While you can’t change the length of your credit history overnight, you can establish good habits early and maintain them over time to build a solid credit history.

4. New Credit

New credit inquiries and accounts comprise approximately 10% of your FICO score. When you apply for new credit, lenders typically pull your credit report, resulting in a hard inquiry. Too many hard inquiries within a short period can lower your credit score and indicate to lenders that you may take on too much debt. Additionally, opening multiple new credit accounts in a short period can lower the average age of your accounts and impact your credit score.

5. Credit Mix

Credit mix accounts for about 10% of your FICO score and refers to the variety of credit types you have, such as credit cards, installment loans, mortgages, and retail accounts. Lenders like to see a mix of credit types, as it demonstrates your ability to responsibly manage different types of credit. Having a diverse credit mix can positively impact your credit score, but it’s essential to only apply for the credit you need and can manage effectively.

Conclusion

Your credit score is a crucial indicator of your financial health and impacts your ability to access credit and favorable terms. By understanding the five key factors that influence your credit score—payment history, credit utilization ratio, length of credit history, new credit, and credit mix—you can take proactive steps to manage your credit effectively. Paying your bills on time, keeping your credit card balances low, maintaining a diverse credit mix, and avoiding excessive new credit applications are all essential strategies for maintaining a healthy credit score. Regularly monitoring your credit report and scores allows you to stay informed about your credit standing and take action to improve your credit health over time. Building and maintaining good credit takes time and discipline, but the long-term benefits are well worth the effort.
Laventure Solutions LLC is committed to empowering individuals with the knowledge and resources they need to take control of their finances and build a brighter financial future. Let us help you on your journey to economic success.