Although there are many credit-scoring models, the goal of these formulas is to figure out the likelihood of you paying your bill on time. And whether you’re looking at a FICO® or VantageScore®, your scores are based on the same information: the data in your credit reports. FICO® and VantageScore® place similar relative importance on five categories of information.
Your payment history is one of the most important credit scoring factors and can have the biggest impact on your scores.
A long history of on-time payments is best for your credit scores, while missing a payment could hurt them. The effects of missing payments can also increase the longer a bill goes unpaid. So a 30-day late payment might have a lesser effect than a 60- or 90-day late payment. How much a late payment affects your credit can also vary depending on how much you owe.
If you’re having trouble making payments at all, you could also wind up with a public record, such as a foreclosure or tax lien, that ends up on your credit reports and can hurt your scores.
Credit usage is also an important factor, one of the few that you may be able to quickly change to improve (or hurt) your credit health.
Your utilization rate is the ratio between the total balance you owe and your total credit limit on all your revolving accounts. A lower utilization rate is better for your credit scores. Maxing out your credit cards or leaving part of your balance unpaid can hurt your scores by increasing your utilization rate.
Pay attention to not just your overall credit utilization, but also the utilization on individual credit cards.
A variety of factors related to the length of your credit history can affect your credit, including the following:
- The age of your oldest account
- The age of your newest account
- The average age of your accounts
- Whether you’ve used an account recently
Opening new accounts could lower your average age of accounts, which may hurt your scores. But the hit to your scores could also be offset by lowering your utilization rate and increasing your total credit limit. Closing an account could lower this factor and hurt your scores, once the account drops off your credit reports. The impact could be more significant if the account was also your oldest account.
Having experience with different types of credit, like revolving credit card accounts and installment student loans, may help improve your credit health.
Since your credit mix is a minor factor, you probably shouldn’t take out a loan and pay interest just to add to your credit mix. But if you’ve only ever had installment loans, you may want to open a credit card and use it for minor expenses that you can afford to pay off each month.
Creditors may review your credit reports and scores when you apply to open a new line of credit. A record of this, known as a hard credit inquiry, can stay on your credit reports for up to two years, even if you don’t get approved for the credit card or loan.
Often a single hard inquiry will have a minor effect. Unless there are other negative marks, your scores could recover, or even rise, within a few months. The impact of a hard inquiry may be more significant if you’re new to credit. It can also be greater if you have many hard inquiries during a short period.
Consumer credit scores, which are determined based on the information in your consumer credit reports, weigh credit score factors similarly. If you focus on improving these factors, you could improve your credit health across the board.