Many different factors can affect your credit score. Not all factors have the same significance, some are major and some are minor. We'll take a look at all of them in this article.

Whenever you consider borrowing money in the form of a loan or credit, it’s important to know what types of actions will help or harm your credit score. At the end of the day, all credit reports contain the same basic information: how likely you are to pay your debt on time. This tells lenders how much of a potential risk you are. Different credit score models give weight to different factors, but the most popular and widely used scoring models, such as as FICO and VantageScore, generally take into account the following five things:

  1. Your payment history

  2. Your credit usage

  3. Your years of credit history

  4. Your types of credit

  5. Your most recent credit

So let’s take a look at each factor individually.

1. Payment History

The single most important factor in your credit score is your payment history. If you want the best score, then it is extremely important to pay your lenders on time. The longer you put off paying your bills, the more your credit score will drop. But don’t worry if you’ve only made a few late payments. As long as you get things back on track and start paying on time moving forward, the negative impact will fade over the course of several months.

If you fail to make payments for six months in a row for any account, then it might end up in collections, or a matter of public record, like a tax lien of foreclosure. These can be very harmful to your scores. Bankruptcy, or even a single collection account can significantly lower your credit score and prevent you from being approved for credit at all.

2. Credit Usage

How you use your credit is important, and luckily it is one factor you can change quite fast. The amount of money you owe on a personal loan, mortgage, auto loan, or a student loan is important to consider -- but what’s even more important is your credit utilization rate.

Your credit utilization rate measures how much of your total available credit you are currently using. It is calculated by dividing your total debt by your total credit limit. A lower rate is better than a higher rate. You don’t want to max out your credit cards or leave a partially unpaid balance on an account, since these will result in a higher utilization rate. For some credit scoring models, your total utilization rate is more important than the utilization rate on any one account, but it’s still important to keep an eye on both. You’re generally regarded as a much higher risk if you have multiple accounts with high unpaid balances.

Remember, even if you pay your bills each month you can have a high utilization rate. This measurement places more importance on your balance than on how timely your payments are made. If you’d like to both use a lot of credit and have a low utilization rate, it is best to make early payments as often as possible.

3. Credit History

When looking into your credit history, lenders will take the following factors into consideration:

  1. How old is your oldest account?

  2. How old is your newest account?

  3. What is your average balance on your open accounts?

When you open a new account, it can reduce your average account age and subsequently lower your credit score. You can offset this impact by keeping your utilization rate low and by increasing your credit limits, as long as your payments are made on time.

Closed accounts can increase the average age of your accounts because they stay on your report for up to ten years. After those ten years have elapsed, the account drops off your credit report. This can lower your account age and hurt your scores, even if the account was in good standing and you made all of your payments on time. If the account happened to be your oldest, this could affect your score even more. There is not much you can do about this, except it’s good to be aware of how it affects your credit score.

4. Types of Accounts on Your Report

The more variation you have amongst the types of credit you use, the better this looks on your credit report. For example, having a blend of revolving accounts like credit cards, as well as installment loans like an auto loan looks better than only having credit cards or only having installment loans.

However, don’t take out an installment loan just for the purpose of introducing variation. If you really want to increase your credit diversity and you've only had installment loans, then apply for a credit card and only use it for small things you can pay off in full every month.

The most damaging types of accounts to have on your credit report are derogatory accounts like charge-off accounts or collection accounts. If you do have accounts in collections, it's worth looking into either paying them off or trying to remove them in the case of inaccurate or invalid information regarding that account. Even paying off a collection won't improve your credit score very much. It may allow you to qualify for credit where otherwise you would not have qualified, but paid collections still affect your credit score negatively.

5. Recent Credit History and Activity

When you apply to open a new line of credit, the first thing a lender takes a look at before making a decision is your credit reports and scores. This is called a hard inquiry and will remain on your credit report for two years. A soft inquiry, on the other hand, happens when you check your own credit, or for certain types of loan prequalification. Soft inquiries, unlike hard inquiries, will not hurt your credit score.

Having too many hard inquiries on your credit report can reduce your credit score by up to 3-5 points per inquiry. If you only have a few inquiries on your credit report, then it won’t be an issue. Having multiple inquiries such as more than six in the last six months could indicate that you represent some risk to the lender since you’ve been applying for a lot of credit. Unless there are other negative factors on your credit report, then you can easily recover from a hard inquiry in a just few months. If you have a lot of hard inquiries in a short period of time, or if you don’t have a lengthy credit history, then a single inquiry could potentially be more harmful to your credit than if you only have a few inquiries or have an existing, good standing credit history.

Despite the negative effect inquiries can have, you should always research and try to find the best loans for you - even if it means getting a few inquiries on your credit report. Lenders and credit bureaus understand that customers want the best possible interest rate, so multiple inquiries regarding a major loan (auto, student, or home loan) in a 15-45 day span are often treated as one single inquiry.


Different companies and different scoring models (like FICO or VantageScore) use different factors when assessing your risk for a loan, but now you know the five major areas. Gradually work on improving in these areas, and you will qualify for better loans and interest rates.

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