Factors That Affect Your Credit Scores

One of the essential factors lenders assess when considering whether to give you money is your credit score. It typically ranges from 300 to 850, but you can improve it over time by learning about the factors that affect it.

Five primary categories affect your score: payment history, amounts owed, credit mix, length of credit, and new credit inquiries. How much each factor weighs depends on your unique financial situation.

Payment History

Your payment history documents how you paid various credit accounts like credit cards, mortgages, and vehicle loans. It includes payments made on time and missed, and it also shows how often you were sent to collections or had a charge-off on an account.

This information is in your credit report, prepared by the three main credit bureaus. The agencies comb through public records to find this information.

Credit card companies, mortgage brokers, and lender like MaxLend, report their payments to the credit bureaus. You can also request copies of your credit reports from the agencies yourself.

Late payments can have a severe impact on your credit score. It is because the credit scoring models consider several factors, including how severe a late payment is and how recently it was made.

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Amount Owed

Amounts owed are the second most crucial factor that affects your credit scores. This category includes your revolving credit utilization and the total amounts owed on different types of accounts, including credit cards, auto loans, and installment loans.

Keep your credit usage ratio low as a general rule – or at least below 30% of your available credit. It will increase your credit score and make you appear a more responsible debt spender.

Having a lot of debt is sometimes good but can indicate financial difficulty. You should make timely payments – even one late payment can significantly lower your credit score. The simplest method to avoid this is to use a mobile banking app to set up automated payments or reminders. Also, consider acquiring a credit card with a low-interest rate or a debt transfer option.

Length of Credit History

Your credit history — the amount of time you’ve had credit — is a significant factor in determining your credit score. 

A long credit history shows you have reasonable payments and are not a risk to lenders. It also helps if you have no late fees or negative items on your credit report.

But a more extended credit history doesn’t mean you will automatically get a higher credit score. That depends on your actions concerning your payment history and how much credit you’re using.

New Credit Inquiries

New credit inquiries, which lenders view to assess your risk, may negatively impact your credit score. Generally, each hard inquiry takes away less than five points from your score, and a high number of credit inquiries in a short time is considered risky behavior by credit scoring models.

The key to minimizing the adverse effects of a hard inquiry is staying on top of your credit. That means making on-time payments, reducing your debt-to-credit ratio, and maintaining a healthy balance on existing credit accounts.

Inquiries within a specific timeframe — such as 14-45 days — will usually count as one in credit scoring calculations, which can minimize their effect on your score. However, if you’re rate shopping for an auto or mortgage loan, multiple inquiries in a short period will impact your score more than a single inquiry.