Credit Score Factors Explained and Myths Revealed
There are different credit score factors that make up your credit score. It’s important to understand these credit score factors when it comes to learning how to improve your score and what is the most damaging to it.
Understanding Credit Score Factors and Breaking the Famous Credit Score Myths
There are a number of credit card myths that you should be aware of when it comes to these credit score factors.
Credit Score Factors
There are some common credit score factors that play a role in how your credit score is determined. While the exact criteria used by each scoring model vary, these are the most common credit score factors.
- Payment History
Payment history is the most important of the credit score factors. Even just one missed payment affects your score. Lenders want to make sure that you are paying back your debt on time when considering you for any new credit. Payment history accounts for about 35% of the FICO score. The FICO score is the score that is used by most lenders.
Since payment history is one of the most important credit score factors it helps to know some more about it. Your payment history is built month by month. Many of the organizations that you owe money to report payment history to one or all of the main credit bureaus. This can include your auto loan lender, personal loan lenders, mortgage lenders, credit card companies, and even stores where you have financed purchases or have a credit card.
Information about unpaid medical bills may even be reported to credit bureaus. If you run into some trouble managing your money then the effect on your credit history could be long-lasting. Late bill payments can stay on your report for up to seven years and any accounts that are sent to collections can also stay for that long. The more recent a late payment, the more it will hurt your score.
Even after the time limit is up, you aren’t necessarily free. While the credit bureaus should remove the information past the seven- or 10-year mark, some may also still keep it on file. The impact of your payment history on your score will depend on different factors, including how recent and how frequently you have paid late, as well as how severe it is. - Credit Utilizationt
This is measured by dividing the total credit you are using at the moment by the total of all your credit limits. This ratio sees how much of your current available credit you are using and gives the lender a picture of how dependent you are on non-cash funds. Using more than 30% of available credit can be a negative to creditors. Your credit utilization score accounts for 30% of the FICO score.
- Credit Mix
If you are aiming for a top credit score then you need a diverse portfolio of credit accounts. Models consider the types of accounts and how many of each you have. Lenders use credit mix to understand your past debt experiences and how you have handled them.
- Hard Inquiries
A hard inquiry is recorded in your file every time a lender wants a credit report as part of their process. Hard inquiries stay on your credit report for up to two years and, in certain cases, can also have a negative impact on your credit score.
- Length of Credit History
The length of your credit history is determined by the length of time each account has been open and the length of time since the accounts’ most recent action. It will be impossible to have a perfect credit score if you are new to credit but it won’t take that long to get a higher score. A long credit history provides more information and offers a good picture of long-term financial behavior.
In order to improve the score, those who don’t have credit history should begin using credit and those who have it should maintain their long-standing accounts. - New Credit
New credit can improve your score. However, this doesn’t mean that you should open multiple credit lines at the same time. This would actually suggest that you are in financial trouble and need access to a lot of credit. You should apply for and open new credit accounts as needed. Newer accounts lower the average account age and this has a larger effect on your score if you don’t have a lot of other credit information.
- Negative Information
There is a lot of negative information that can be found on your credit report. Some of the negative information that lenders can find includes missed or late payments, collection accounts, foreclosures, and charge offs. This negative information typically means that you have defaulted on a loan in the past. It can be a red flag for lenders who you want to approve you for new credit.
The effect the negative information will have on your score will depend on your overall profile and what type of record it is. The records will usually stay on your file for at least seven years so it’s always best to avoid any negative information if possible.
Types of Accounts That Impact Your Credit Score
Credit File
It contains information about two different types of debt. This includes revolving credit and installment loans. Since both installment accounts and revolving credit keep a record of debt and payment history they are important credit score factors.
Installment Credit
This is a loan where you are borrowing a fixed amount and then agree to make monthly payments toward the overall balance until you pay off the loan. Personal loans, mortgages, and student loans are examples.
Revolving Credit
It is usually associated with credit cards but can also include home equity loans. When you have a revolving credit account, you have a credit limit and then make a minimum payment based on how much credit you use. There is no fixed term and revolving credit can fluctuate.
How to Improve Your Credit Score
With credit scores explained, it’s easier to see how you can improve your credit score.
Pay Bills on Time
Since payment history is the most important factor that means paying bills on time is the best thing you can do to improve credit.
Pay Down Debt
Reducing your credit card balances helps lower your credit utilization ratio and this can be a fast way to see a credit score boost.
How to Improve Your Credit Score
Make Any Outstanding Payments
If there are payments that are past due, bring them up to date as soon as possible in order to prevent your score from taking an even bigger hit. Late payments will include just how late the payment is and the more time that has passed, the larger the impact on the score.
Dispute Any Discrepancies
Mistakes can happen and your credit score can suffer if there is inaccurate information in your file. Be sure to monitor your credit report so that inaccurate information doesn’t appear. If you find something that seems off then initiate a dispute.
Limit Your New Credit Requests
Limiting the number of times you ask for new credit reduces the number of hard inquiries on the credit report. The impact of the score does fade over time, even though a hard inquiry will stay on your report for two years.
What Do You Do if You Don’t Have a Credit Score?
If you want to start building your credit score, there are a couple of things you can do.
Make Sure You Are Taking Care of Your Credit. The Creditry Store Will Teach You How.
Get a Secured Card
A secured card is used the same way as a conventional card. The only difference is that there is a security deposit, which is equal to the credit limit when you sign up for the card. The security deposit helps guard the issuer of the card if you default and makes the lender more comfortable with taking on riskier borrowers. Make some small purchases on the card and then pay your bill in full in order to help build and establish your credit.
Be an Authorized User
If you are close with someone who already has a credit card, you can be added as an authorized user to jump start your credit. With this option, you are given your own card and spending privileges on the cardholder's account. Credit card issuers report authorized users to the credit bureaus, which then adds to your credit file. You want to make sure the primary cardholder does make all their payments on time in order for you to benefit.
Credit Score Myths
When understanding your credit score, it helps to know about these credit score myths.
Income Impacts Your Credit Score
While there are a lot of credit score factors, income doesn’t directly affect your credit score. Income does matter for your loan applications and credit cards. Loan approval is based on several factors, including your credit score and earnings, but those are two separate pieces of information. Income can play a role in new credit score models that allow you to voluntarily submit information but it’s not currently a factor.
Just like income isn’t a factor, bank balances aren’t a factor either. There can be a correlation between a good credit score and good saving habits but a person can have a lot of money in the bank and still have a bad credit score if they aren’t using the money to pay bills on time.
Debit Cards Help with Your Credit Score
Debit cards don’t affect your credit history and don’t have any impact on your credit score. In fact, using a debit card is basically the same thing as using cash. If you have ever selected credit at the checkout when using your debit card, it just determines how the merchant processes the card and what fees it pays and has nothing to do with the score. Prepaid cards won’t factor into your score either. Loans and credit cards are the main financial products that have an impact on your score.
Applying for a New Card Doesn’t Hurt Your Score
Applying for new credit can hurt your score in different ways. When you apply for new credit, there is a hard inquiry. If you have several hard inquiries within a short period of time, it’s a problem in the eyes of lenders. When the bank does approve your credit application, new credit can also hurt your score. Your score can be dinged since it hasn’t been that long since you have opened your new account so it affects the length of credit history.
Closing a Credit Card Account Helps Your Score
Closing a credit card hurts and doesn’t help your score. It reduces the amount of available credit you have and this affects your credit utilization score. Closing an account can also affect the length of the credit history. Closing accounts you have had for a long time shortens the average age of your accounts. If you are trying to pay down debt, it’s best to not use your cards but keep them active. Once you have paid down the debt, use them sparingly.
Your Credit Score Is Good if You Don’t Have Any Debt
This one seems kind of backward since there are plenty of dangers of credit card debt but you don’t really get rewarded if you don’t have any debt. Establishing a positive credit history will be impossible without on-time and consistent payments. Without an open active account, you don't even have a credit score. If you have other loans and have a solid payment history, you do have a score but establishing a credit history is much easier if you have a credit card. Since credit mix is part of your score, a diverse mix that includes credit cards will be the best for your score. If you want to see credit card offers from different lenders, put in your information in this form below, and we'll work on getting you offers from lenders:
This doesn’t mean that you need to go into debt to get a good score. You can charge a small amount each month and then pay it off in full in order to improve your score.
Getting Married Means You Merge Credit Scores
You and your spouse will still have separate credit scores and credit histories, even after you get married. If you have a joint account, it will affect both of your scores but if you still have individually held accounts then it only affects the score of the account holder.
Paying Off a Collection Prevents It from Hurting Your Score
Paying off any collections will help your score in the long run but you shouldn’t expect an immediate increase from paying it off. Once the collection is on your report it will factor into your credit score until the reporting time limits out. For collections under $100, there are some exceptions but this is usually only for newer credit scoring models that tend to ignore these lower collection amounts.
A Bad Score Means You Won’t Be Approved for Anything
A bad credit score can make it harder to be approved but it’s not the only factor that a lender considers when evaluating your creditworthiness. The level of debt and income are also other factors that play a role. You can be approved with a less than great credit score but you may have to pay a higher interest rate.
Disputing Information Helps Your Credit Score
While you should absolutely dispute information that is wrong on your account, just because you dispute it doesn’t mean that that information is going to be deleted. Even if a dispute is returned in your favor, there isn't an absolute guarantee that your credit score will go up. This doesn’t mean that you shouldn’t be monitoring your score and filing a dispute if necessary, just don’t think that it could be the holy grail to fixing any credit problems.
It Takes Seven Years to Improve Your Credit
A lot of negative information does stay on your credit report for seven years but as the negative information gets older, it has a lesser impact on your score. You are able to improve your credit score in the meantime before the negative information falls off if you keep a reasonable level of debt and, of course, make your payments on time.
Checking Credit Hurts Your Score
You are able to check your score as many times as you want without hurting your credit but you need to be using credit score services that are doing soft inquires and not hard inquires like lenders would use. In fact, checking your credit can be helpful so you can report any inaccuracies.
Some people think you only need to check your score when you are applying for a loan. However, you should check your report and scores throughout the year, at least once a year, in order to verify your credit health. Monitoring your score regularly will help you make sure that you are managing your credit properly.
Finally,
Credit scores don’t have to be a mystery. While it may seem like it’s a mystery, there are certain credit score factors that play a role in how your credit score is determined. Some of the credit score factors are more important than others, with on-time payments being the most important. If you are going to work to improve your credit score or establish credit, it’s important that you don’t believe these credit score myths.