The three-digit number that’s your credit score holds a lot more power than you might think. It can influence the interest rate your receive on a loan, how much debt you qualify for, and whether or not you get a job. Most consumers check their credit score a couple of times a year but might not know what impacts the score.
We’re here to help you not only pay down debt but also level up your financial life. If you want to get ahead financially, you’ll need a solid understanding of credit score calculations.
Key Factors that Impact Your Credit Score
There’s a great deal of complexity behind the calculation of your credit score, and it’s not easy to “crack the code,” so to speak. However, both FICO and VantageScore provide insight into the factors used in their scoring models.
Length of Credit History
Your length of credit history impacts your FICO and VantageScore credit score. FICO looks at three factors relating to your credit history – your oldest account’s age, the age of your newest account, and an overall average of every account. Your credit history makes up approximately 15% of your FICO score. VantageScore performs a similar calculation but may omit closed accounts, resulting in a lower average age. Under VantageScore, the length of credit history is “less influential.”
Now, you might be wondering, “what is considered a strong credit history?” Many financial experts suggest that seven years is enough time to establish a respectable history to reach a “very good” or “exceptional” credit score. However, you shouldn’t just focus on the length of your credit use. Instead, focus on building a solid rapport with no late payments, collections, foreclosures, or bankruptcies. Even if you have a credit history dating twenty years or more, a single missed payment could cause your score to drop significantly.
Although not a significant determinant of your credit score, your credit mix makes up 10% of your FICO score and slightly impacts your VantageScore credit score. Generally, you shouldn’t have just one type of debt (i.e., credit card debt). A mixture of credit, including revolving and installment loans, will give your credit score a nice bump. By having diversified types of credit, you show prospective lenders that you can manage your finances effectively.
Unfortunately, there’s no predefined credit mix that you should try to achieve. If you only have credit cards, it might not make sense to take out an installment loan since your credit mix only makes up 10% of your credit score. Rather than focusing on perfecting your credit mix, you should focus on timely payments (a factor that has a more significant impact on your credit score).
Amounts owed significantly affect your personal finances and play a massive role in your credit score calculation. The balance you owe to creditors makes up 30% of your FICO score and is “moderately influential” to your VantageScore credit score. You’ll also hear financial advisors call amounts owed “credit utilization.”
You can calculate your credit utilization rate by dividing your total debt by your total available credit. Financial experts recommend keeping your utilization rate below 10% – 30%. Therefore, you should avoid maxing out your credit cards unless you have other available credit lines that lower your utilization rate.
Our software features a credit utilization tool that enables you to carefully monitor how much credit you have used compared to your total available credit. The tool provides real-time updates, making it extremely easy to determine if you need to change your spending habits.
The FICO scoring model gives 10% weight to new credit accounts, and the VantageScore model considers recent credit activity as “less influential.” When you open a new line of credit, the lender performs a hard inquiry, which usually results in a slight drop in your credit score. FICO only looks at one year of hard inquiries, but they remain on your credit report for two years.
Opening new lines of credit affects two other components of your credit score – your length of credit history and credit mix. New lines of credit will reduce your average age of accounts (part of your credit history). Subsequently, you may notice a more impactful decrease in your credit score. On the other hand, you might see an increase in your credit score if you’re diversifying your credit mix. For example, someone who only has credit cards could benefit by getting an installment loan. However, keep in mind – your credit mix makes up 10% of your score, and your length of credit history makes up 30%.
Your payment history is undoubtedly one of the most critical factors that influence your credit score. It’s no surprise that creditors want to lend money to people who have a proven history of making timely payments. Your payment history makes up 35% of your FICO score, and the VantageScore model considers it “extremely influential.” Therefore, it’s not unheard of for a single late payment to drop your score 100 points.
The best way to maintain a clean payment history is to set up automatic bill payments. Not only will you protect your credit score, but you’ll also avoid late payment fees.
Our platform can help you if you’re having trouble staying on top of your payments. We provide you with crucial spending insights, making it easier to identify subscriptions and significant, one-time expenses. Once you can pinpoint excessive expenses, you can strategize a plan to cut spending and allocate more money towards debt. Remember, if you make more than the minimum payment, you’ll save money in the long run.
Now that you know what impacts your credit score, it’s time to view key spending insights, pay down debt, and ultimately achieve financial freedom. A poor credit score can set you back, but don’t worry – our platform empowers you to get a grip on your finances and boost your credit score at the same time.