The Five Factors That Determine Your Credit Score
Your credit score is determined by five key factors, each carrying a different weight in calculating your overall score. Understanding these factors can help you maintain or improve your credit standing. Here’s a breakdown of each, and their impact on your final score.
1. Payment History (35%) Your payment history is the most significant factor influencing your credit score. Lenders want to see a consistent track record of timely payments. To avoid late or missed payments, set up automatic payments where possible to cover at least the minimum amount due.
2. Credit Utilization (30%) Credit utilization refers to how much of your available credit you’re using. A good rule of thumb is to keep your credit utilization below 20%—meaning if you have a total credit limit of $10,000, you should aim to use no more than $2,000 at any given time. High credit usage signals to lenders that you may be spending outside your means, making you a higher-risk borrower.
3. Age of Credit (15%) The length of your credit history also plays a role in your credit score. Lenders prefer to see a long history of responsible credit usage. Closing old accounts or frequently opening new ones can reduce your credit age, ultimately lowering your score.
4. Number of Inquiries (10%) When you apply for a new credit card, mortgage, or any other type of loan, lenders perform a hard inquiry on your credit report. Too many hard inquiries in a short period can be a red flag, suggesting that you may be overly reliant on credit. Try to limit hard inquiries to no more than two per year. Soft inquiries, such as checking your own credit score, do not affect your credit history.
5. Credit Mix (10%) Having both revolving credit (such as credit cards) and installment loans (such as student loans or auto loans)—can positively influence your credit score. However, this factor has the least impact, so you shouldn’t open new credit accounts solely to improve your credit mix.
By understanding these five factors and managing them wisely, you can maintain a strong credit score and increase your financial opportunities. Prioritizing on-time payments and keeping credit utilization low will have the most significant impact on your score, helping you achieve long-term financial health.