What Determines Your Credit Score
Even though you might not be able to predict your exact credit score, thereâs no reason to feel like youâre totally in the dark, controlled by a mysterious system. You can control the outcome of your credit scoreâat least a great majority of it.
Specifically, you can count on credit bureaus weighing the following five factors to calculate your score, plus the approximate percentage of your score theyâll account for. Weâll also tell you a little bit about what these factors entail, so you can know exactly what lowers your credit score in each of these categories.
1. Payment History
- Timely repayment across all types of credit
- Details about late payments, such as why those payments were late, how recently they occurred, amount owed, and how many overall late payments are on your record
- Bankruptcies, liens, foreclosures, and lawsuits
- Balance owed compared to available credit
- How much debt is still owed to lenders, across all types of credit
3. Age of Credit History
- How long itâs been since credit accounts were opened
- How long itâs been since credit accounts have been used
4. New Credit
- Amount of time since your most recent inquiry
5. Credit Mix
- Number of credit accounts you have, including credit cards, business installment loans, retail accounts, and consumer finance company accounts
- Types of credit accounts you have, meaning revolving, installment, or a mix
Too Few Types Of Credit
The remaining 10% of your FICO score is based on the types of credit you use, such as credit cards, a mortgage, an auto loan, and so forth. Having only one type of creditjust credit cards, for examplecan have a negative impact on your score. Having a variety of credit types improves your score because it marks you as an experienced borrower.
If remembering to pay bills on time is a problem for you, consider setting up automatic payments or subscribing to reminders via email or text.
What To Do After Your Credit Limit Decreases
If you notice one of your limits drop, contact your creditor immediately for more information. This reduction could be a mistake, but if it’s not, you’ll want to know why your limit was reduced.
Ask the creditor whether it has a policy for reissuing previous credit limits. If you catch it in time, you may be able to get it back. If not, you’ll need to figure out why it was reduced and work toward remedying whatever caused it.
If you see your utilization ratio increase as a result of a credit limit reduction, focus on how you can bring it down before it impacts your scores too much. Here are a few things you can do to improve your utilization:
As you consider actions to take when a creditor decreases your credit limit, monitor your credit scores so you can see what your overall credit utilization is and how it’s impacting your scores. You can get free credit monitoring from Experian that can alert you to changes in your credit.
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Ask To Have Negative Entries That Are Paid Off Removed From Your Credit Report
You may have a series of late payments on your credit report, or perhaps an old collection account that’s since been paid off still shows up. If this is the case, ask to have them removed.
This step may take more time and effort on your end, but it could be worth it. Triggs suggests speaking to the collections agency, debt buyer or original creditor to remove a paid-off account from your credit report.
“You’d most likely have better results using this method with collection agencies or debt buyers versus the original creditor,” he says.
Try to convince them to not only show the account as paid, but to remove the account altogether, which could have a much bigger impact on your credit score. “Having even a paid collection account or paid charge-off on your credit report could deter creditors in issuing you future credit at all,” Triggs says.
How Many Inquiries Is Too Much
Six hard inquiries are considered too many. Statistics show that Americans with at least six inquiries are more likely to default on loans or file for bankruptcy. The exact limit, however, also depends on the financial institution policy, the reason for the inquiry, credit history, and personal debt.
Remember that each hard check remains on your record for about 24 months. It, however, negatively affects your score for about 12 months. Also, multiple checks performed for the same reason, for example, mortgage or a personal loan, count as a single inquiry.
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Make The Most Of A Thin Credit File
Having a thin credit file means you dont have enough credit history on your report to generate a credit score. An estimated 62 million Americans have this problem. Fortunately, there are ways you can fatten up a thin credit file and earn a good credit score.
One is Experian Boost. This relatively new program collects financial data that isn’t normally in your credit report, such as your banking history and utility payments, and includes that in calculating your Experian FICO credit score. Its free to use and designed for people with no or limited credit who have a positive history of paying their other bills on time.
UltraFICO is similar. This free program uses your banking history to help build a FICO score. Things that can help include having a savings cushion, maintaining a bank account over time, paying your bills through your bank account on time, and avoiding overdrafts.
A third option applies to renters. If you pay rent monthly, there are several services that allow you to get credit for those on-time payments. Rental Kharma and RentTrack, for example, will report your rent payments to the credit bureaus on your behalf, which in turn could help your score. Note that reporting rent payments may only affect your VantageScore credit scores, not your FICO score. Some rent reporting companies charge a fee for this service, so read the details to know what youre getting and possibly purchasing.
Does Paying Off Credit Card Debt Raise Your Credit Score
You may be able to improve your credit score if you pay off a large chunk of your credit card balances. Even if you don’t reduce your aggregate utilization rate down to less than 30%, getting it down to as close to that as possible will have a positive impact. Any effort to pay off more than the minimum payment on your cards each month might result in an incremental improvement of your credit score as long as you’re doing all the other things that positively impact your score, like paying bills on time.
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Refinancing Or Debt Consolidation
Refinancing or consolidating debt can lower your credit score. This often happens when a homeowner takes out a home equity line of credit or takes on other large lines of credit in a short time. For example, if someone takes out a credit card and an auto loan and also refinances their home over the course of a few months, they could likely expect their score to plummet due to a sudden spike in credit. By paying these accounts off each month, your score can be expected to bounce back over the course of several months or a couple of years.
Why Would Checking Credit Score Lower It If Done By A Financial Institution
Financial institutions check the score of customers applying for credit cards, loans, etc., all of which scream debt. So, if youre looking to take an auto loan or a credit card, the amount you owe will increase. With debt negatively affecting the FICO rating, these inquiries lower your score.
On the flip side, checking your rating yourself wont have any effect on your score. In fact, its highly recommended for American adults to perform FICO score checks at least once a year. Not only this doesnt hurt the score, but it also helps people keep track of any unauthorized changes.
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Trying To Raise Your Credit Score
A higher score may give you more options and better rates if you ever need a car loan, mortgage, or home equity line of credit. Even if you dont have immediate plans to apply for financing, good credit may help you in other ways, like lower insurance premiums, renting an apartment and certain employers even run credit checks on job applicants prior to hiring them. Focusing on developing good long-term credit habits is an investment in yourself. Here are some specific actions you can take that may help to improve your score over time.
Length Of Credit History: 15%
The length of your credit history makes up 15% of your credit score.
If youve never had a loan or a credit card before, youll have a young average age of accounts in your credit history.
Your main strategy here will be to wait a few years and try to keep your new accounts open if youre just starting out in your personal finance life.
If you have already established a credit history, closing too many accounts can lower the average age of your credit and then lower your score.
So even if you get a debt consolidation loan and pay off your credit card debt, consider keeping some of the paid-off accounts open.
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Keep Old Accounts Open And Deal With Delinquencies
The age of credit portion of your credit score looks at how long you’ve had your credit accounts. The older your average credit age, the more favorably you appear to lenders.
If you have old credit accounts youre not using, dont close them down. Though the credit history for those accounts would remain on your credit report, closing credit cards while you have a balance on other cards would lower your available credit and increase your credit utilization ratio. That could knock a few points off your score.
And if you have delinquent accounts, charge-offs, or collection accounts, take action to resolve them. If you have an account with multiple late or missed payments, for instance, get caught up on the past due amount, then work out a plan for making future payments on time. That wont erase the late payments, but it can improve your payment history going forward.
If you have charge-offs or collection accounts, decide whether it makes sense to pay off those accounts in full or to offer the creditor a settlement. Newer FICO and VantageScore credit-scoring models assign less negative impact to paid collection accounts. Paying off collections or charge-offs might offer a modest score boost. Remember, negative account information can remain on your credit history for up to seven yearsbankruptcies for 10.
What Is New Credit
New credit makes up 10% of a FICO Score. When you apply for new credit, inquiries remain on your credit report for two years. FICO Scores only consider inquiries from the last 12 months.
People tend to have more credit today and shop for new credit more frequently than ever. FICO Scores reflect this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk – especially for people who don’t have a long credit history. Your FICO Scores take into account several factors when looking at new credit.
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Ask Your Creditor To Increase Your Card Limit
If you have a card with a $5,000 limit and youve spent $2,500, this gives you a 50% utilization rate. You can call your card issuer and ask for a limit increase up to, say, $25,000, if you’ve had a change in income. This change in your card limit puts you at only 10% utilization, which could make a substantial difference to your credit score. Note, though, that credit bureaus can also ding you for requesting additional credit since this can result in a hard inquiry to your credit report.
If you have made a few late payments or switched to a job that doesnt pay as much income, your card issuer could reduce your . Consider whether your circumstances will make a good case for a limit increase before you ask for one.
How Much Debt Is Too Much
There’s no magic number as to how much debt is too much, although the rule of thumb is to try and keep your credit utilization level at less than 30% in total.
Remember that this is total or “aggregate utilization” that’s calculated by your credit score, so taking out a new card to spread your debt across cards to reduce your utilization rate on each card may not be a good strategy to lower your utilization. It can potentially hurt your credit score to do this, because taking out a new card will result in a “hard inquiry” or credit check of your score something that can also reduce your score.
However, if your available credit limit increases, it may not affect it.
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Option #: Check Your Credit Scores With Credit Monitoring
- New hard inquiries
- Late or missed payments
- Collection actions
Thats helpful, especially if youre worried about identity theft or fraud. A credit monitoring service could alert you right away if a new credit account is opened in your name that you didnt authorize.
But theres a catch. Credit monitoring services dont always furnish FICO Scores. They may offer VantageScores instead.
VantageScores are an alternative scoring model that are used by a growing number of lenders. But they arent as widely accepted as FICO Scores. So if youre interested in getting your FICO Score, a credit monitoring service may not be much help.
Can Service Accounts Impact My Credit Score
Service accounts, such as utility and phone bills, are not automatically included in your credit file. Historically, the only way a utility account could impact a credit score was if you didn’t make payments and the account was referred to a collection agency.
But this is changing. A revolutionary new product called Experian Boost now allows users to get credit for on-time payments made on utility and telecom accounts.
Experian Boost works instantly, allowing users with eligible payment history see their FICO® Score increase in a matter of minutes. Currently, it is the only way you can get credit for your utility and telecom payments.
Through the new platform, users can connect their bank accounts to identify utility and phone bills. After the user verifies the data and confirms they want it added to their credit file, they will receive an updated FICO® Score instantly. Late utility and telecom payments do not affect your Boost scorebut remember, if your account goes to collections due to nonpayment, that will stay on your credit report for seven years.
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Very Important: Credit Usage
Credit usage is also an important factor, and its one of the few that you may be able to quickly change to improve your credit health.
The amount you owe on installment loans such as a personal loan, mortgage, auto loan or student loan is part of the equation. But even more important is your current .
Your utilization rate is the ratio between the total balance you owe and your total credit limit on all your revolving accounts . A lower utilization rate is better for your credit scores. Maxing out your credit cards or leaving part of your balance unpaid can hurt your scores by increasing your utilization rate.
Sarah Davies, senior vice president of analytics, research and product management at VantageScore, says that for VantageScore® credit scores, your overall utilization rate is more important than the utilization rate on an individual account.
But utilization rates on individual accounts can also affect your credit scores. This means you should pay attention to not just your overall credit utilization, but also the utilization on individual credit cards. Having a lot of accounts with balances might indicate that youre a riskier bet for a lender.
Why Do Hard Inquiries Hurt Your Credit Score
Your credit score is based on the information in your credit report, including credit inquiries and the age of your credit account. For FICO scores, new credit inquiry information contributes to 10% of your credit score. Though it’s a small percentage, perhaps, it can impact your score.
According to FICO, one hard inquiry will only knock about five points off your credit score for 12 months. The VantageScore credit scoring model also factors in hard inquiries when calculating your credit score, but the negative impact doesnt last as long.
Many hard inquiries on your account over a short period may have a greater impact on your credit score. Why? Because it suggests to lenders that you may be short on cash or about to rack up debt. In their eyes, youre a higher-risk customer.
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Somewhat Important: Length Of Credit History
A variety of factors related to the length of your credit history can affect your credit, including the following:
- The age of your oldest account
- The age of your newest account
- The average age of your accounts
- Whether youve used an account recently
Opening new accounts could lower your average age of accounts, which may hurt your scores. But the hit to your scores could also be more than offset by lowering your utilization rate and increasing your total , making sure to make on-time payments to the new card and adding to your credit mix.
Closed accounts can stay on your credit reports for up to 10 years and increase the average age of your accounts during that time. But once the account drops off your credit reports, it could lower this factor, and hurt your scores. The impact could be more significant if the account was also your oldest account.