What Affects Your Credit Score the Most?

There are many factors that affect your credit score. The most important is the number of on-time payments you’ve made. Why is that such a big deal? Your credit score provides lenders with a good idea of how trustworthy you are as a borrower. They want to know that, if you borrow cash, you’re going to pay it back on time.

However, making payments on time isn’t the only thing that can affect your credit rating. Each major credit reporting bureau (Experian, Equifax, and TransUnion) all have their own methods of calculating your credit score based on five main determining factors.

Read on to learn more about those five different factors as well as what you can do to ensure that you’re optimizing your efforts of maintaining or improving your current credit score.

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What Are the Main 5 Factors that Affect Your Credit Score?

1. Payment History

Payment history is the biggest thing that affects your credit score. In fact, it makes up at least 35% of your score. So, you can't ignore this factor! 

Why is it so important? As mentioned, your credit score is a number that is designed to predict your likelihood of paying back a loan, like an auto loan or mortgage

This means that lenders are going to want to see if you’re responsible when paying back the money you borrowed. Payment history is a pretty good indicator of how responsible you are. If you're paying your bills late or skipping out on them altogether, it will definitely hurt your credit score. The best thing to do here is to make a payment schedule and stick to it so that you don't miss out on any payments.

If you've never missed a payment, but are really trying to improve your credit score, you can take steps to avoid missing one. You could set up auto-pay for all of your bills, this way no amount of forgetfulness will stop you from sending that payment off on time.

2. Amounts Owed

The amount of money you owe (i.e. the total amount of debt you have) accounts for roughly 30% of your credit score, meaning that it’s just as important as payment history in terms of monitoring and improving your credit rating.

Be careful to keep the amount of debt at a reasonable and manageable level so that you can easily pay it off each month. The lower your amount that’s owed, the better, but in reality, it’s your credit utilization rate that you’ll want to keep an eye on.

Credit utilization rate refers to the percentage of credit extended to you that you are currently using. For example, if your limit is $3,000 and you have a current balance of only $1,500, the amount of debt being used would be 50%. That's on the low end for most people (although 2021 studies do show that the average credit card debt is a little over $6,000).

A good rule of thumb is to stay below 30%. This will help keep your credit score up!

3. Length of Credit History

The length of your credit history is important because, like your payment history, it shows potential lenders that you have a long history of being a good borrower. That and, well, it accounts for 15% of your score.

How do you build a credit history with no credit history? It’s the big catch-22 with credit scores. If you’re young, we suggest asking your parents or a trusted family friend to add you as an authorized user to their account. You’ll benefit from their good credit habits.

If you’re older and need to build credit history, try getting a secured card. These types of cards are backed by a deposit that you get back after a set period of time. As long as you make on-time payments, it’ll help you establish a good credit history that’ll help you improve your score.

4. Credit Mix

A credit mix is the combination of credit types that you currently have. Utilizing different kinds of credit (like revolving lines of credit, installment loans, etc.) will help reinforce your overall score. A good mix of credit involves you having both revolving credit and installment loans.

Some of the most common installment loans are student loans, mortgages and car loans. These types of loans are the kind you pay back installments (i.e. a set monthly payment that you make until the loan is paid off). Lenders look at these types of loans to see if you can pay back money consistently over a set period of time.

The most common type of revolving credit is a credit card. This type of revolving debt shows that you can take out different amounts of credit each month and budget for yourself in order to pay it back on time.

5. Hard Inquiries

You might also see this as “new credit” listed on certain credit reports, but ultimately this is one of the five main determining factors that affect your credit score. "New credit" is the amount of credit accounts that you've opened within a given time frame. A “hard inquiry” is a mark on your report that occurs when you apply for a new loan or a line of credit.

It’s best to keep your number of hard inquiries low. When you have a lot of hard pulls on your report, it might appear that you’re a risky borrower as it looks like you’re desperate for cash and are applying anywhere and everywhere where you can get it.

Improve Your Credit Score to Increase Your Wealth

At the end of the day, your credit score will mostly determine the types of loans you’re able to access and the interest rates you’ll have for each loan. When building wealth and investing in assets such as properties, this is super important.

If you’d like to start learning how to increase your credit score, download the Wealth Stack app. We’ve created free video courses for you to learn from. There, you’ll be able to learn how to improve your credit score and then learn how it relates to and plays into the rest of your financial foundation.