Your credit score plays a major role in your financial life. From getting approved for a loan or mortgage to the interest rates you’re offered, your score can significantly impact your ability to access credit and manage financial opportunities. Understanding what affects your credit score—and how to improve it—can help you take control of your financial future.
A credit score is a three-digit number, usually ranging from 300 to 850, that represents your creditworthiness. The most commonly used model in the U.S. is the FICO score. Lenders use this score to assess the risk of lending you money or extending credit.
The most significant factor affecting your credit score is your payment history. This accounts for about 35% of your FICO score. Making on-time payments on credit cards, loans, and other debts shows lenders that you’re reliable. Late or missed payments, especially if they’re frequent or go into collections, can severely damage your score. Setting up automatic payments or reminders can help ensure you never miss a due date.
The second biggest factor is credit utilization, which makes up roughly 30% of your score. This is the percentage of your available credit that you’re using. For example, if you have a credit card with a $10,000 limit and a $3,000 balance, your utilization is 30%. Most experts recommend keeping your utilization below 30% to maintain a healthy score. Paying down balances and increasing your credit limit (without increasing spending) can improve this ratio.
The length of your credit history accounts for about 15% of your score. Lenders like to see a long track record of responsible credit use. This is why it can be helpful to keep older credit accounts open, even if you don’t use them often. Closing an old account can shorten your credit history and negatively impact your score.
Your credit mix also matters. This factor, which makes up about 10% of your score, refers to the different types of credit you have—such as credit cards, student loans, auto loans, and mortgages. A diverse credit portfolio shows that you can manage different forms of debt responsibly. However, don’t take out loans just to improve your mix. Focus on maintaining healthy habits with the credit you already have.
The final factor is new credit inquiries, which account for the remaining 10%. When you apply for a new line of credit, lenders perform a “hard inquiry” into your credit report. Too many of these in a short time can hurt your score. While one or two inquiries won’t have a major impact, it’s best to avoid applying for multiple credit lines unless necessary.
If your credit score isn’t where you want it to be, there are steps you can take to improve it. Start by checking your credit report for errors. You’re entitled to a free report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once a year through AnnualCreditReport.com. Dispute any inaccuracies that could be dragging your score down.
Consistently paying your bills on time and reducing your overall debt are two of the most effective ways to improve your score. Avoid maxing out your credit cards, and try to pay more than the minimum balance each month. If you’re struggling, consider a debt repayment plan or working with a credit counselor.
Building and maintaining good credit takes time, but the benefits are worth it. A higher credit score can help you qualify for better loan terms, lower interest rates, and greater financial flexibility.
In conclusion, your credit score is a critical component of your financial health. By understanding the key factors that influence it and making informed, consistent decisions, you can improve your score and open the door to greater financial opportunities.