Your credit score is a very important number. It helps lenders to determine your likelihood of paying back debt.

This means that you are unlikely to get a loan if you have a poor credit score.

Aside from determining whether you get approved for loans, you credit score also determines how much interest you will pay for the loans.

Various types of lenders depend so much on this number, which typically ranges between 300 and 850.

Credit card companies, mortgage bankers and auto dealerships are example of lenders that will typically check your credit score before approving your loan.

Lately, landlords, utility companies and insurance companies have also started looking at your credit card to help them gauge your likelihood of making the required payments.

Your credit score is not a static number.

It is calculated based on the information in your credit file, which means that the number keeps changing as your financial profile changes.

Unfortunately, many people have no idea what affects their credit score.

Knowing the factors that affect your credit score is important because it gives you the opportunity to improve your score, which in turn means better access to loans and lower interest on these loans.

While there are a number of credit scoring models that might be used to calculate your credit score, they all try to do the same thing – use the information in your credit file to determine your likelihood of making payments on time, or even making the payments at all.

As such, whether a lender uses FICO, VantageScore, or any other credit scoring method, and though there might be a slight variation on your credit score depending on the scoring model used, they all basically look at the same information.

Typically, there are five major factors that affect your credit score.

Of these five, some have a more significant impact on your credit score than others.

Below is a breakdown of the five biggest factors that affect your credit score.


This is the most important factor when it comes to calculating your credit score.

When using the FICO credit scoring model, which is the most commonly used by lenders, your payment history makes up 35% of your total credit score.

The idea behind the payment history is that your past long term behavior is a good predictor of your future long term behavior.

In other words, someone who has consistently made all their payments on time in the past is more likely to make future payments on time, while someone who has regularly made late payments or missed some payments is more likely to do the same in future.

Therefore, even missing a single payment can negatively impact your credit score.

When using your payment history to calculate your credit score, the following factors are considered:

  • Have the bills for each account on your credit report always been paid on time? Late payments have a negative impact on your credit score.
  • For late payments, how late were you in making the payment? Generally, late payments are considered in 30 day periods, with the impact of the missed payment increasing the longer the payment remains unpaid. Therefore, a 90 day late payment will have a greater impact on your score than a 30 or 60 day late payment.
  • If you have missed payments on your credit file, when was the last time the entry was made, and how frequently have you missed payments? Someone who missed a payment four years ago is considered to be less risky than someone who missed a payment six months ago. Similarly, someone who has only one missed payment on their record is less of a risk than someone with several missed payments.
  • Have you ever had any of your accounts taken to collections? Potential lenders treat this as a red flag that you might not pay back the loan.
  • Have any bankruptcies, foreclosures, charge offs, liens, attachments, debt settlements, wage garnishments, law suits, or public judgments been brought against you? If you have any such items in your public record, they are treated by most lenders as red flags of your inability to pay a loan.

When checking your payment history, FICO monitors installment loans, such as student loans and mortgages, as well as revolving loans, such as credit cards.

Owing to the importance attributed to payment history, one of the most effective ways of improving your credit score is to make sure that you consistently make your payments on time.


After payment history, the next major factor that affects your credit score is your credit utilization – the percentage of available credit that you have actually borrowed.

Credit utilization accounts for 30% of your total credit score.

When it comes to credit utilization, less is better for your credit score.

People who get very close to or who max out their credit limits are considered to be irresponsible at handling debt, and are therefore considered to be a greater risk.

Your credit utilization ratio is calculated by dividing the total revolving credit you currently have by the total of all the credit limits you are allowed to borrow.

The credit utilization ratio gives lenders a glimpse into how reliant you are on debt.

When using your credit utilization ratio to calculate your credit score, the following factors are considered:

  • How much have you borrowed compared to your total available credit? The aim here is to have as little debt as possible. However, this does not mean that having zero debt will automatically result in a higher credit score. While less is better, having some level of debt shows that you are comfortable with borrowing and that you are responsible when it comes to paying back borrowed money.
  • How much have you borrowed on specific types of accounts, such as installment accounts, auto loans, mortgages and credit cards? Ideally, having a mix of different types of credit is considered as a sign of someone who can responsible manage debt. We will take a more detailed look at credit mix later.
  • What balance do you currently owe compared to the initial amount borrowed? Once again, less is better.

According to FICO, people with high credit scores usually have an average credit utilization ratio of 6% or less and an average of 3 accounts carrying a balance.

Most also typically owe less than $3000 on revolving accounts.

However, this does not mean that you also need to have a credit utilization ratio of 6% or less in order to have a good credit score.

However, most lenders consider borrowing more than 30% of your available credit as a red flag, so it is advisable to keep it below 30%.

You might have noticed that payment history and credit utilization are the most important factor when it comes to calculating your credit score.

These two factors make up for 65% of your total credit score.

Therefore, simply paying your bills on time and having only a small balance on your credit accounts are all you need to have a good credit score.

The remaining factors help move your credit score from good to great.


Most scoring models will also take into account the amount of time you have been using credit when calculating your credit score.

The longer your credit history, the more financial information lenders have about you and the easier it is for them to come up with a more accurate picture of your long term financial behavior.

The length of credit history makes up 15% of your total credit score.

When using your length of credit history to calculate your credit score, the following factors are considered:

  • For how long has each of your accounts been open?
  • How old is your oldest account?
  • For how long have you had obligations?
  • What is the average age of all your accounts?
  • What length of time has passed since your most recent action in your accounts?

The longer your credit history, the more likely you are to have a higher credit score, provided your credit history is not blemished by missed payments and other negative items.

This is why it is advisable to leave your credit card accounts open even if you no longer use them.

The age of the accounts helps give your score a boost.

On the other hand, closing your oldest account can result in a decline in your overall score.

You should also avoid opening several new accounts at once, since this can lower your average credit age and in turn lower your credit score.

Don’t despair if you have a short credit history.

Provided you don’t miss any of your payments and you maintain low utilization ratios, it won’t take you long to achieve a high score.

For those without a credit history, you can improve you credit score by taking advantage of credit.


Your credit score also takes into consideration the number of new accounts you have applied for in the recent past and the last time you opened a new account. New credit makes up 10% of your total credit score.

However, don’t be in a rush to take lots of new credit thinking that it will help improve your credit score.

On the contrary, taking lots of new credit within a short period of time might suggest that you are in financial trouble, which in turn makes lenders consider you to be a great risk.

Therefore, you should only apply for new credit as needed, not as a way of improving your credit score. You might be wondering how lenders will know that you recently applied to new credit.

Normally, when you place an application for a new line of credit, the potential lender will put in a request for your credit information.

This is referred to as a hard inquiry, also known as a hard pull. These hard pulls reflect on your credit information.

Having hard inquiries on your credit file will often result in a small and temporary decline in your credit score.

This is different from a soft inquiry, which does not negatively impact your score.

A soft inquiry happens when you access your own credit information.

Having several hard inquiries on your credit file negatively impacts your credit score because it signifies that you have applied to several lines of credits within the recent past and might therefore be experiencing cash flow problems, which makes you a greater credit risk.

To understand how hard pulls work, let’s assume a situation where you apply for financing from an auto dealership.

Before approving your loan, the car dealership will request for your financial information.

If they realize that you have recently applied for several new credit card accounts, this could be a signal that you intend to go on a spending spree in the near future, which might make it difficult for you to afford the monthly installments the dealership initially assumed you could comfortably afford.

This might make the dealership to rethink their decision of selling you the car on credit. It is good to note that the FICO model, which is the most commonly used, only looks at the new credit you have taken within the previous 12 months, so you don’t have to worry about hard pulls that occurred over a year ago.

At the same time, it is advisable to limit the number of times you apply for new lines of credit within each 12 month period.

Sometimes, especially when you want to purchase a house or a car, you might go rate shopping to find the cheapest financing option available.

All the potential lenders you visit will most likely request to check your credit information, resulting in multiple hard inquiries appearing on your file.

However, since these hard inquiries are similar and are usually clustered around the same time, they are generally counted as a single inquiry.

When similar hard inquiries appear together, the assumption is that you are shopping, rather than planning to buy several homes or cars at once.

To make sure that hard inquiries resulting from rate shopping are treated as a single inquiry, it is always advisable to do your rate shopping within a month or less.


This is the last major factor that affects your credit score, contributing to the final 10% of your score.

Credit mix refers to how diverse your credit accounts are. It is also one of the most overlooked factors by people trying to improve their credit score.

Credit accounts usually fall into one of two types – revolving accounts and installment loans.

The most common types of revolving credit account are credit card accounts and store accounts. Examples of installment loans include mortgages, car payments, personal loans, and so on.

When considering your credit mix, lenders look at both the types of credit accounts you have and the number of accounts of each type that you have.

So, why does having diverse credit lines improve your credit score.

Having multiple lines of credit sends the message that you have experience managing various types of credit and that you have the financial capability to service your credit.

It also helps the lender create a far more accurate picture of your financial status.

However, having multiple lines of credit will improve your credit score provided you don’t have any missed and late payments on these credit lines.

When you don’t have any previous debt, lenders don’t have a good idea of how you responsible you are when it comes to managing debt, and therefore they will give greater preference to someone who has demonstrated the ability to responsibly manage debt.

Since credit mix only constitutes 10% of your total credit score, not having a particular type of credit won’t really push your credit score down significantly.

Still, the more types of credit you have, the less risky lenders will consider you to be, provided you have consistently serviced your current debt on time.

This can help move your credit score from good to great.

However, like I mentioned in the previous section, don’t just take on some unnecessary debt for the sake of improving your credit score. Only take debt when you actually need it.


Now that you know the major factors that affect your credit score, how can you improve your credit score so that you have better access to loans and lower interest rates on these loans?

Before we get into how to improve your credit score, I want to give a disclaimer. Improving your credit score is somewhat comparable to losing weight. If you want to lose weight, you have to patiently exercise and watch your diet over time.

The changes take place gradually. The same thing applies to improving your credit score. You won’t see the improvement immediately. It will take some time.

Therefore, if you come across anyone promising that they can help improve your credit score with instant results, you should be very wary.

With that out of the way, below are some tips on how to improve your credit score.

  • Make sure all your payments are made on time, and if for some unavoidable reasons you can’t make the payment on time, try and make the payment within 30 days after the deadline. We already saw that payment history is the largest contributor to your credit score, so you don’t want to mess up your payment history by missing payments. If you regularly forget to make the payments on time, set up reminders through your online banking portal, so that you will receive an SMS or email to remind you to make the payment before the deadline. Alternatively, you can set up automatic payments such that your payments are automatically debited from your bank account into your credit account on the due date.
  • Monitor your credit utilization ratio and ensure that your credit card balances do not exceed 30% of your total available credit.
  • Reduce the amount of debt you owe. Doing this both improves your credit score and gives you a satisfying sense of achievement. However, this can be quite a challenging thing to do, and will need lots of discipline from you. If you feel that your debt has greatly ballooned, the first thing you need to do is to keep the debt from increasing by stopping using your credit cards. From there, create a list of all the credit accounts you have, what you owe for each account and the interest for each. Then come up with a payment plan that allows you to offset the highest interest debt first, while making minimum payments on the other lines to avoid missed payments.
  • Avoid opening new accounts within a short span of time, since this will lower the average age of your accounts.
  • If you are thinking of making a big purchase that will need you to take a loan, such as buying a car or a house, you should check your credit score several months in advance. This gives you enough time to improve your score before applying for the loan.
  • If you are rate shopping for a specific loan, do it within a short period of time, possibly within less than 30 days. Extending your rate shopping over a long time will result in multiple hard inquiries appearing on your credit file, which will in turn hurt your credit score.
  • If you have trouble making your payments, talk to your creditors or consult a credit counselor. While this will not lead to an immediate improvement in your score, it will allow you to come up with better ways of managing your credit and making timely payments, which will ultimately increase your score. Note that talking to your creditors about your difficulty making payments will not negatively affect your credit score.


Knowing the factors that affect your credit score and how to improve your score means you will have an easier time getting approved for loans and better interest rates.

While there are many different models for calculating the credit score, most of them will consider the five factors discussed above, and if you focus on improving these factors, you will have a much better credit score.

The 5 Biggest Factors That Affect Your Credit Score

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