You probably know that lenders use your credit score to determine whether or not to extend you credit. It dictates rates, terms and credit limits for your big purchases—like a car or home.
And it can determine what neighborhood your kids grow up and go to school in, and what car you drive cross-country in on your family vacation.
Credit scores range from 300 to 850; higher is always better.
But do you know what helps and harms it?
Key Factors that Determine Your Credit Score
Credit scores tend to fluctuate constantly. But when you know what affects your credit, you can start to see the actions that will either bring your score up or down.
Here are a few of the key factors that determine your credit score, and how heavily they’re weighted.
Credit card utilization is the percentage of how much of your available credit you’re using. It’s determined by taking the total of all your credit card balances, and dividing it by your total credit card limit. This is weighted very heavily in your score.
Stick to a number below 30% for each of your accounts. Using more than 30% of your available credit on a card can result in a reduction in credit score.
Paying on time is a clear-cut indication that you’re credit-worthy, and responsible enough to meet deadlines. It has a very heavy weighting on your score: missing just a couple payments can bring it down drastically.
Set up automatic payments, create alarms and reminders, tie a piece of string to your finger; anything to keep you from forgetting your payments.
Derogatory marks include collections, bankruptcies, and liens. They’re like bruises on your credit history. They can last anywhere from 7 to 10 years, and will continue to bring your credit score down, until they eventually drop off.
Other factors that play much smaller roles in determining your score include things like the:
- Average age of your accounts
- Total number of accounts you have
- Amount of hard credit inquiries you acquire. These come from things like applying for a credit card, auto loan, or mortgage.
Things That Harm Your Score (that are not so obvious)
Some actions (or inaction) that seem like they’d improve your credit score, actually harm it.
Closing old credit cards.
Seems like a no-brainer. It means less risk of spending money you don’t have, right? But what this actually does is bring down the average age of your credit history—as well as the amount of debt available to you (or your credit card utilization, mentioned above)—negatively affecting your score.
Opening too many credit cards.
Doing this increases your risk factor—especially if they’re store-sponsored cards.
You should close your most recently opened cards, especially those from your favorite department, hardware, or electronics store.
Not asking for a higher credit limit on your established, older credit cards.
Why is this a mistake? It means you’re missing an opportunity to cushion your debt utilization.
When you’ve established a good track record of paying on time, and your credit is on the rise, increasing your credit limit can keep you under the 30% debt utilization target.
Questions You Might Be Embarrassed to Ask
Credit scores are also known as FICO scores—why?
FICO (Fair Isaac Company) is the largest data analytics company that supplies credit scores to lenders. The credit bureaus listed below have jointly developed an alternative model called Vantage Score.
What are Equifax, Experian, and TransUnion?
These are credit bureaus that provide lenders with the credit reports and scores. Lenders use these to determine whether to lend to you or not. The scores provided by the three may slightly vary, but they should be in the same ballpark. You can get a copy of your score from each, generally for a price.
Does being a cosigner put my credit score at risk?
Yes. Though you aren’t expected to pay the monthly balance on what you cosigned for, you’re on the line if the primary borrower doesn’t pay.
Missed payments will affect you the same as it will the primary borrower, so be wary before putting your financial neck on the line. However, being a cosigner can improve your credit, if the primary borrower is responsible and pays on time.
If you have a poor credit score, it isn’t the end. Knowing your score, and how to improve it, are the first steps to credit recovery.