Here are the six main factors and how they can impact your credit score.
1) Open Credit Card Utilization
Your open credit card utilization rate is your available credit compared with how much you're using at any given time. It can be calculated by taking your total credit card balances and dividing that number by your total credit card limits. The resulting percentage is your utilization rate.
In a previous article on credit card utilization, Credit Karma collected data from 70,000 credit scores to find out how credit utilization and credit scores correlate. In general, it was found that the lower the utilization rate, the higher the credit score. The one exception is with consumers who have a 0% utilization rate; their scores are generally much lower than those consumers who maintain a utilization rate of 1-30%. For that reason, it's a good idea to use the credit cards you have responsibly and regularly.
It's important to note that your credit utilization rate is not calculated by the balance you carry over from month to month; it is the balance you have at the time that your credit card issuer reports to each credit bureau. Therefore, it is not necessary to carry over a balance from month to month; you need only show regular credit card use.
2) Percent of On-Time Payments
Your percentage of on-time payments represents how often you make loan payments on time. It's a heavily weighted factor in calculating a credit score, so just one or two late payments can significantly affect your score.
Paying bills on time is one of the best ways to keep up good credit health; it shows lenders and creditors that you're reliable and will pay back your debts.
3) Number of Derogatory Marks
These include accounts in collections, bankruptcies, foreclosures, and liens. Your credit score will be severely negatively affected by a derogatory mark on your credit report. Derogatory marks typically take seven to ten years to clear from credit history, and they generally cannot be removed earlier.
A derogatory mark can severely influence your chances of getting approved for credit; it shows a lender that you may have significantly mismanaged credit in the past.
4) Average Age of Open Credit Lines
This piece of your credit score averages the ages of your credit cards, mortgages, auto loans, student loans, and any other lines of credit on your credit report. If your credit history is lengthy, lenders will be able to more accurately assess creditworthiness; they can better assess how you might manage the credit they extend to you.
For this reason, closing your oldest credit card account is typically ill-advised. It will shorten the length of your credit history and reduce your available credit, possibly increasing your credit utilization rate. In a previous article, Credit Karma wrote about when you may want to close an old credit card account, and when to avoid doing so.
5) Total Number of Accounts
This piece of your credit score totals up your number of credit cards, auto and student loans, mortgages, and other lines of credit. Consumers with a higher number of credit accounts generally have better credit scores, since they've been approved for credit by more lenders. Also, having various different types of credit--both revolving and installment--on your profile can positively contribute to your creditworthiness.
However, it's not recommended to open several new lines of credit simply to increase your total number of credit accounts. This factor of your credit score is weighted less heavily than the rest. If you are in the market to apply for new credit, make sure you first read reviews and research which product is right for you.
6) Total Hard Credit Inquiries
The final factor in your credit score is your total number of hard credit inquiries. Hard inquiries occur when a financial institution, such as a lender or credit card issuer, checks your credit in order to decide whether to approve you for a loan or credit card. A hard inquiry will occur when you apply for any of the following:
- Auto loan
- Student loan
- Business loan
- Personal loan
- Credit card
One hard inquiry will negatively affect your credit score by a few points, but the affect will begin to lessen after a couple of months. Multiple hard inquiries will more significantly impact your credit score, and can communicate to lenders that you are desperate for credit or are unable to qualify for credit. For this reason, it's a good idea to avoid applying for several lines of credit at once.
It's important to know that, while some of these factors are weighted more heavily than others, no one factor works independently of the others. Each one contributes to your overall credit score.