What Has the Biggest Impact on Your Credit Score?

This guide will help you make better decisions that inform your spending patterns to avoid ruining your financial reputation.

Your history of payments, how you use your credit cards, how old your line of credit is and the types of credit you’re using all play an important role in determining your credit score. How each of these factors plays into your overall credit score depends on which model is being used, as this differs from a financial institution to an institution. There are many different metrics and methods to compute them to determine the numbers that in turn determine how many financing options you can explore in life.

News Alert: Until April 2022, Get a Cost-Free Weekly Credit Report
The economic ravages of COVID-19 have left the credit bureaus with little other choice than to extend access to their analysis reports. A breakdown of your credit report is available on annualcreditreport.com every seven days!

Being up to speed on your own financial standing when it comes to your credit spending habits is key in order to prevent blunders that might ruin your credit score!

Credit Scores: Which element plays the largest role?

The score you receive has many factors in play, each playing a unique role. Even if two different scoring methods give you different numbers, you remain largely within the same credit bracket. How you perform in one scoring model is indicative of how you will score in all of them, even if these numbers are not identical.

Credit Scores: Looking at key elements

The Fair Isaac Corporation Score, often just abbreviated to the FICO score, is a tool often used to evaluate your suitability for paying back credit. The system used to determine this is kept up-to-date and was last modified in 2020. Your FICO plays perhaps the most important role in determining what kind of loan you can get. A different used metric is the VantageScore which was primarily employed by Transunion Credit, Experian, and Equifax. These two systems use some of the same metrics to achieve their results. Let’s take a look at a comparative chart proceeding from the highest factor to the most insignificant factor:

FICO ScoreVantageScore
Highest FactorHistory of Credit PaymentsConsumer Credit patterns: charged-off, late payments, current payments.
High FactorOutstanding Credit Card BalanceAccount Age, kind of credit being utilized
Significant FactorAccount AgeCredit threshold calculated as Percentage of outstanding debt to payment ratio. Net balances divided by the net balance of present and delinquent debt.
Less Significant FactorAccount Nature mixed with new account creationCredit Inquiry submissions and New Account Creation.
Insignificant FactorAvailable Credit Limit

Sources: FicoScore.com and VantageScore.com

Credit Scores: How can you increase net positivity?

How you use your credit card is important in both of the models explored above. Being diligent and timely on your payments of outstanding debt and proving that you can use credit responsibly is a factor that increases creditors’ trust in your financial ability.

It’s better to make sure your outstanding debt is always 0 and to pay your credit as soon as you can afford to. Making piecemeal payments in installments is possible, as long as you’re not putting it off for too long. How you utilize your credit advances is carefully monitored by credit issuers and your primary goal is to demonstrate that you can be trusted to use credit wisely. With a higher credit score, your chances of receiving a loan on more than beneficial terms and conditions increase proportionately. Concretely, this means lower interest rates and more laxity in the timeline of repayment. Keep in mind that while your credit score is one of the main things lenders look at, it’s by no means the only factor in determining whether you will be accepted for a loan of a larger sum.

Closing a credit account is a bad idea, even if you can’t trust yourself to use it responsibly. By leaving an account open without any outstanding debt, you’re automatically increasing your scores. Remember that the age of your account is one of the most important elements in both models compared above.

Of course, your particular financial circumstances may demand the exploration of different avenues. Ultimately, your judgment is called for when figuring out how you’re going to use money advances.

Frequently looking at your weekly credit report is a good way to show your creditors that you are always staying on top of your spending. Looking at this analysis won’t be a waste of time, as you’ll see much the same thing that a potential creditor sees. Looking at this report can also be useful to catch spending that wasn’t made by you, indicating if your card might have been compromised.

It is possible that someone has used your social security number to open lines of credit in your name. Playing the detective to find incongruences in your report will help you avoid potentially allowing someone else to damage your credit score. Identity theft is an issue we have previously written about, and if you think you might be a victim, we urge you to read about what steps you can take next.

Other times there will simply be data-entry errors that can have negative impacts on your credit. If you’ve spotted these in your report, we advise you to read our guide on the process of credit repair to set things straight.

Credit Scores: What decreases your net score?

Late payments (considered about a month after purchase) of your consumer credit expenses are the largest and most significant element when it comes to finding yourself with shrinking credit digits. All of these late payments are compiled onto your report and stain for 7 years.

The longer you wait to pay the bill, the more interest fees rack up and the lower your credit score becomes. Most banks and other creditors have online services or mobile applications that are very user-friendly. Signing up on these platforms is a good way to pay off your debt as soon as it arises instead of allowing it to accrue over time.

Alternatively, you can speak with representatives at your financial institution to sort payments out over the phone, in person, or via mail, though this last option is becoming more and more outdated by the day.

Declaring bankruptcy will send your credit score into free fall and will haunt you for upwards of 10 years unless you get your books in order. If you need help deciding whether bankruptcy is the right choice to relieve piling and insurmountable debt, look at all of the pros and cons on our page on bankruptcy. If you’re worried about the effect it will have on your credit score, we will give you the ins and outs to help minimize the impact it has.

If the outstanding sum owed on your credit card is too high, this will also decrease your scores, as it is considered a sign of high credit utilization for expenses that you shouldn’t be charging onto advanced funds. Keeping high balances on your credit accounts shows your lenders that you are a liability and are statistically more likely to default on your loans or frequently make late payments.

The more credit inquiries you make in an attempt to secure advanced funds from different sources, the higher of a flight risk you are signaling to your creditors. By this, we mean that lenders might suspect you of being insolvent and therefore highly at risk of neglecting financial duties.

The best practice is to open new accounts only when it is needed.

N.B: Your credit score doesn’t harbor grudges!

If you’ve wisened up in recent years, your scores will reflect that. In other words, debt delinquency will not follow you forever and the scar it leaves on your accounts fades over time. Depending on the recent derogatory payment was, the lower your present credit score will be.

New elements that figure into your credit score

In the last half-decade, consumer credit has had some significant overhauls for the better! Let’s take a look at some of these now:

  • Liens used to secure the payment of taxes to the IRS do not affect your Credit Score. This new standard began affecting consumers in April 2018
  • Debt accrued from hospital emergencies uncovered by insurance has a lower significance on your scores than it formerly had.
  • FICO, Experian, and Finicity started using the UltraFICOTM Score in 2019, a score that pays closer attention to things like the movement of funds in and out of all your accounts.
  • Experian Boost was launched in 2018 to improve people’s credit scores when it was being spent on things like a cell phone, electric, or heating bills among other living expenses.

Which elements play no role at all in determining your credit score?

Your revenue is not factored into your credit score. Creditors will look at your net worth and annual revenue when determining your eligibility for a mortgage loan, or your credit limit. How old you are, how many degrees you hold, where you have worked, what sex you identify to, where you’re from, whether or not you’re married or which ethnicity you belong to are all factors that are not at all considered when it comes to credit score.

While this guide acted as an introduction, if you didn’t find the level of detail to answer your inquiries, you might be better off looking at this in-depth guide to credit scores.