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Knowledge Center



Do You Know What Impacts Your Credit Score?

Consumers in today’s market know the importance of a good credit score. It’s a vital figure that’s used to determine if an individual can secure credit, whether in the form of loans or credit cards.

Credit scores are complicated metrics, and many consumers don’t fully understand how they are derived. That means that otherwise reliable borrowers might unwittingly make mistakes that could reduce their score and hurt their ability to obtain credit in the future.

Residential Mortgage Services is not a credit reporting agency and we don’t provide these services. The following article is for educational purposes only. Read on to learn more about the five major factors used to determine your credit score.

How are credit scores calculated?

There are five main factors that metrics like the FICO® score use to calculate an individual’s credit score. These are meant to capture the scope of a consumer’s credit behavior and help lenders determine if they are reliable borrowers. The percentage figures indicate how important each factor is to the overall score.

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

Credit scores are living metrics, and each of the above factors can be changed over time by responsible borrowing and spending. If they know what to look out for, individuals can adjust their score over time and increase their own likelihood of obtaining credit.

Main factors

  1. Payment History - is the most important factor affecting your credit score, amounting to 35% of ratings for each major credit reporting agency. This metric takes into account your history of making payments on time, and helps creditors determine how likely you are to pay down your debt.

    One late payment is unlikely to negatively impact your score, especially if the other factors listed below are good. However, consistently missing payments signals to creditors that you’re an unreliable borrower, and this can bring down your score over time.

    Payment history doesn’t take into account certain expenses, like utilities or rent; it only considers debt payments. However, consistently missing rent or utilities bills can hurt a good credit score if your landlord chooses to transfer the accrued debt to an external collection account.

    Taking charge of your credit score
    The easiest and simplest way to improve this component of your score is to pay your bills on time. Record the due dates for each of your bills in a calendar, and keep a tight budget to ensure that you can actually fulfill your obligations. It’s also important to make the payments you’ve already missed. Outstanding debts can negatively impact your score the longer they go unpaid, so ensure that you catch up on all missed payments to boost your credit score.

     
  2. Amounts Owed - The amount of debt accounts for 30% of your credit score. It’s considered one of the most important metrics for lenders because there is a negative correlation between the amount a person owes and their ability to pay it, according to research conducted by FICO®.

    Amounts owed is a complicated factor, however, and it’s not solely determined by total dollar figures. Reporting agencies also take into consideration the number of accounts that have payments owed as well as different types of accounts.

    Credit utilization ratios also play a crucial role. This figure shows the amount of credit a borrower is currently using compared to the credit they have available. A high ratio demonstrates to lenders that a borrower is unable to keep their finances under control. Z

    Taking charge of your credit score
    Similar to payment history, the best thing you can do to improve this metric is to consistently make your payments on time. Avoid opening unnecessary lines of credit while you still have outstanding debt as this would increase the amount you owe and could reduce your score. It’s also important to budget responsibly and maintain good credit utilization ratios. A good rule of thumb is to keep your credit utilization rate at or below 30%, according to Experian.

     
  3. Length of Credit History - Creditors want to know that potential borrowers are reliable, and those that can show a long track record of consistent payments and responsible borrowing are considered less risky. To measure length of credit history, lenders typically consider the age of your oldest and newest accounts, how long each account has been open, and how long since the accounts were used.

    Taking charge of your credit score
    This factor presents a problem for many borrowers because it takes time to build up a history, making it difficult for those without a long record to obtain credit. The good news is that length of credit history only accounts for 15% of your credit score. Unfortunately, the only way to improve it is to develop a good history over time.


    Think of your credit score as its own investment. Each of your credit card balances, every payment you make, and every loan you acquire will influence your score, so take steps today to put yourself in a good position for when you need credit in the future.

    Many borrowers close older accounts that they seldom use without realizing the implications it could have for their credit score. This can actually hurt your score because it could reduce the length of credit history your record shows and make you look less reliable. Consider keeping these accounts open and in use to demonstrate your history.

     
  4. Credit inquiries - Credit is a must for shoppers and buyers in today’s consumer market, but opening new lines of credit might invite overspending, leading to an inability to make payments. This might flag you as a risky borrower and bring down your credit score. Whenever you apply for credit, lenders inquire about information on your credit history, and a high number of inquiries on your record can hurt your score. The amount of new credit accounts for 10% of your score.

    Mortgage inquiries are dealt with differently. They are typically too inconsequential to have a major impact on your score, and newer scoring systems will not usually include mortgage inquiries when tabulating your score.

    It’s important to know that requesting and checking your credit score (or “inquiring” into your own score) will not have an impact.

    Taking charge of your credit score
    You should limit the number of new accounts you open during a certain period of time. Determine which lines of credit are most useful to you and hold yourself to them. Even if you need more credit, give yourself some time between applications to protect your score.

    Managed carefully, your credit score can still be improved by opening new accounts, so long as they are different from each other. Overseeing a range of different types of debt signals to lenders that you are a capable borrower, which can boost your score. (More on that below.)

     
  5. Credit Mix - This is the fifth major factor scoring companies use to determine credit scores, designed to demonstrate how well a potential borrower can manage different types of debt. Accounting for 10% of the score, this metric shows lenders that the type of debt doesn’t change a borrower’s ability to pay it down.

    There are two main types of credit: revolving and installment. Revolving accounts include credit cards and gas station cards, and installment accounts include mortgages, student loans, car loans and other types of long-term credit.

    Taking charge of your credit score If most of your credit falls under just one of the above categories, your credit score might take a hit. Consider opening a different type of account to boost the variety of your debt. As you pay down the debt over time, your credit score will reflect your ability to manage different types of credit.

What Doesn’t Affect Your Credit Score

  • Spouse’s credit history. Sharing finances is common practice for married couples, but credit scores are individual calculations. Marrying someone with a bad credit score won’t directly impact yours (though your spouse’s credit behavior might eventually affect you if you choose to open joint credit accounts).
  • Bank balances. Your credit score depends only on your credit history, so your current bank balances are not factored into your score. Keep in mind that individual lenders might (and often do) ask for information on your income before giving loans.
  • Debit cards. Activity on your debit cards (and other prepaid cards) does not impact your credit score. Debit cards do not contain any lines of credit, so the use of this cash won’t change your score.
  • Rent and utilities. As mentioned above, rent and utilities bills don’t directly impact your credit score. They can, however, if you fall too far behind on your payments and your landlord (or other service provider) transfers your debt to a collection account.
  • Checking your credit score. Also mentioned above, checking your own score is not the same as an inquiry, so it won’t have any effect.

Developing Your Credit Management System

Credit scores are complex metrics that can be impacted by a whole range of actions and behaviors. Understanding how credit scores are tabulated can help you make sound financial decisions and make you better able to secure credit when you need it.

As we said in the beginning, the information in this article is for educational purposes only and does not constitute legal or other financial advice. For more information on credit, check out the webpages of Equifax, Experian or TransUnion, or the Consumer Financial Protection Bureau or other local state agencies. Before you take action, do your research and consult with an accredited counseling professional, if needed.

Taking out a mortgage is a major life decision, so it’s important to make sure you’re following the right steps to ensure the process is as smooth as possible.