Common Things That Improve or Lower Credit Scores

A credit score is a three-digit number that helps financial institutions assess your credit history and estimate the risk of extending credit or lending you money. Credit scores are based on information collected by the three main credit bureaus, Equifax, Experian and TransUnion. The most common credit score is the FICO scorenamed after the company that designed it, Fair Isaac Corporation.

Your credit score can be a deciding factor in whether or not you qualify for a loan and, if so, the interest rate you will pay on it. It can also be used to set your insurance rates and even be viewed by potential employers and landlords. This article explains how your FICO score is calculated, what information is not taken into account, and some common things that can lower or raise your credit score.

Key points to remember

  • Your credit score is calculated based on five main factors, including your payment history and the amounts you owe.
  • A problem in any of these areas can cause your score to drop.
  • You can also boost your credit score by taking positive steps like paying your bills on time and reducing your debt.

Investopedia/Julie Bang


How is a FICO score calculated?

Your FICO score is based on five main factors listed here in order of weighting:

  • 35%: payment history
  • 30%: amounts due
  • 15%: length of credit history
  • 10%: new credit and recently opened accounts
  • 10%: types of credit in use

What is not included in a FICO score?

Although FICO considers a variety of factors to determine your score, it ignores certain other information, including:

  • Race, color, religion, national origin, genreor marital status
  • Age
  • Salary, occupation, title, employer, date of hire or work history
  • Place of residence
  • Interest rates on your current credit cards or other accounts
  • Alimony or alimony
  • Certain types of requests, including consumer requests, promotional requests from lenders without your knowledge, and employment requests
  • That you got credit counseling

Note that although FICO is the most widely used credit score, it is not the only one, and other scoring companies may consider some of these listed factors.

What can lower a credit score?

A misstep in one of the five scoring factors listed under “How is a FICO score calculated?” can have a negative effect on your credit score. Here are some examples.

Late or missed payments

35% of your FICO score is based on your payment history, including information on specific accounts (credit cards, retail accounts, installment loans, mortgage, etc.); certain adverse public records (such as privileges, foreclosures and bankruptcies); the number of outstanding items on file and the length of time those accounts are outstanding.

Too much credit used

Another 30% of the FICO score is based on how much you owe as a percentage of the credit you have, such as your credit card limits. Having a percentage that is too high (eg over 30%) can mean that you are overwhelmed and may have trouble paying off your debts in the future. This is often called your credit utilization rate.

A short or no credit history

Although age is not factored into the FICO score, the length of your credit history is. A the young person will usually have a lower credit score than an older one, even when all other factors are the same. Another 15% of your FICO score is based on the length of your credit history, including the time since opening and using the various accounts.

Too many requests for new lines of credit

As mentioned above, your FICO score does not take into consideration consumer-initiated or promotional inquiries about your credit report. This means you can check your own credit score without risking damaging it, and companies that inquire before sending you promotional notices (like pre-approved credit card solicitations) will not affect your score, That is. The 10% of your FICO score based on new credit includes the number of recently opened accounts (and the percentage of new accounts out of the total number of accounts), the number of recent credit inquiries (other than inquiries from consumer and promotional inquiries), and how long has it been since new accounts were opened or credit inquiries made.

Too few types of credit

The remaining 10% of your FICO score is based on the types of credit you use, such as credit cards, mortgage, car loan, etc. Having only one type of credit, such as credit cards, can negatively impact your score. Having a variety of credit types improves your score because it marks you as an experienced borrower.

If remembering to pay your bills on time is a problem for you, consider setting up automatic payments or signing up for email or text reminders.

What can increase a credit score?

As FICO notes, improve bad credit is a gradual process. There is no magic bullet and beware of any person or company that tries to sell you one. FICO’s basic advice for rebuilding credit is to “manage it responsibly over time.” Here are some of the steps you can follow:

  • Check your credit report to identify problems; for added peace of mind, consider using one of the best credit monitoring services
  • Set up automatic payments or payment reminders to pay your bills on time
  • Reduce your overall debt level
  • Paying off debt rather than moving it, such as from one credit card to another
  • Keep your credit card and revolving credit balances low
  • Apply for and open new credit accounts only when necessary
  • Rent one of best credit repair companies to negotiate with your creditors and work with the three credit agencies on your behalf

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