1. Payment history
Your payment history (or your ability to consistently pay bills on time and stick to credit agreements) has by far the biggest impact when it comes to your credit score. According to FICO, one of the main scoring models, it accounts for 35% of your overall score, so it’s vital to pay close attention to your repayment schedules and never miss a payment. Granted, a single lapsed payment likely won’t hurt your score too much, but if you consistently miss payment dates your score can start to slide – and the later you are, the bigger the hit. This is because creditors report all payment activity to the credit bureaus, and multiple late payments can have a significant impact. Bear in mind that this typically only applies to debt repayments, such as credit cards, mortgages and loans, with utilities and mobile phone bills (and similar) not reported in the same way and as such a late payment won’t typically hurt your score. The exception to this is if you’ve fallen way behind and your account is turned over to debt collections, in which case your score can be left with a serious dent.
2. Credit utilization
Your credit utilization ratio – or the amount you currently owe in relation to the amount of credit you have available to you – accounts for 30% of your FICO score, making it the second-most important determinant of your credit profile. Lenders want to know that you’re not already overstretching yourself financially, and if you have several maxed out credit cards, it indicates that you’re struggling. Ideally, you don’t want to use more than 30% of your available credit limits; this is seen as an acceptable amount of credit usage, indicating a responsible, financially-stable borrower who isn’t overly reliant on finance.
3. Age of accounts
The age of your accounts can have a surprising impact on your credit score – it accounts for 15% of your FICO score – and the longer the better. This means you should aim to keep old credit accounts open, even if you’ve paid them off; not only can this improve your credit utilization ratio, but it can boost your score purely due to your long credit history. Credit scoring agencies will consider both the age of your oldest account and the average age of all of your accounts combined when determining the impact on your score. The only reason to close old accounts is if you’re paying a fee on a card you no longer use, for example, or if having an open credit card will be too much temptation to spend, particularly if you’re trying to reduce your reliance on credit.
4. Credit mix
Accounting for 10% of your FICO score, your credit mix refers to how your portfolio of credit accounts is made up. Ideally, you want to have a mix of both revolving and installment credit – typically credit cards and loans/mortgages – in order to show that you’re able to effectively manage different types of product and indicate your ability to repay debt.
5. New credit/enquiries
The number of new accounts you have – and the number of accounts that you’ve recently applied for – will account for 10% of your FICO score, with hard enquiries causing a temporary dip to your profile. This is because lenders assume that a lot of applications and resulting enquiries means you’re desperate to access finance and are potentially facing cash flow problems, which will mean you’re classified as a higher credit risk accordingly. For this reason, it’s important to not make too many applications for different forms of credit over an extended period to ensure it doesn’t present a red flag.
Can anything else impact my score?
By and large, anything that can impact your score will primarily be variations of the previous points. For example, if you pay off a credit card balance and close it, or a loan is repaid and the account closed, your credit score could take a slight hit. At the opposite end of the spectrum, taking out new refinance mortgage loans (or similar) could have an effect, with refinancing often temporarily hurting your score by virtue of it being a new account. Bear in mind too that if you fall behind on any bills not normally reported to credit bureaus – such as medical bills, child support payments, even parking tickets and gym memberships – and they end up going to collections, the collection agency may report it and your score could nosedive. Given that derogatory marks can last on your report for seven years, this is something you want to avoid at all costs. The overall amount of debt you have can also have an impact on your score, or at least, on the likelihood that lenders will approve your application, particularly if your debt-to-income ratio is less than ideal. As such, you’ll want to focus on paying down your debt before you take on any additional credit commitments. Yet something as simple as reporting errors could also be negatively impacting your score, through no fault of your own. This is why it’s so important to check your credit report on a regular basis so you can spot any incorrect information, and can make the relevant credit bureau aware to get such errors expunged. It’s certainly possible to dispute errors and fix your credit score on your own, though some might like specialist support, in which case seeking the best credit repair services should be your first port of call.
