Credit card companies, lenders, landlords and even prospective employers use credit scores to determine an individual's level of financial responsibility.
Credit scores are intended to be snapshots of a person's credit history. They are calculated by Fair, Isaac & Co., commonly referred to as FICO, and many lenders use them to make decisions about approval and pricing.
When individuals have low scores, their credit applications are often denied or approved only at higher interest rates. Because many lenders use a person's score to set loan cost, it is important to understand the main factors that affect scores.
Factors affecting credit scores
- Payment history (35%). This includes on-time payments, collection accounts and past bankruptcies; recent delinquencies such as a 30-day late payment can have a strong negative impact.
- Outstanding debts (30%). The amount owed compared with available credit matters; a high balance on a single card can hurt more than low balances spread across accounts.
- Length of credit history (15%). Older accounts in good standing generally help your score more than newly opened accounts.
- Types of credit (10%). A mix of credit (installment loans and revolving accounts) can improve a score, while certain finance-company loans may be viewed less favorably by some scoring models.
- Recent credit inquiries (10%). Applying for new credit can temporarily lower your score, especially when multiple inquiries appear in a short period.
Different lenders and scoring services may emphasize some factors more than others. If you work with credit unions or banks, see Credit Unions Services Insurance and Insurance for Credit Unions and Banks for related consumer and institutional considerations.
Scores typically range from 300 to 900, with an average around 750. As scores rise above the average, default risk tends to decline and borrowers usually qualify for better rates; those below the average may face difficulty obtaining affordable loan terms.
Because the three major credit reporting bureaus may not have identical information, scores can vary slightly between them. For example, one bureau might include a collection account that another does not, which can produce differing scores from each bureau. State-chartered institutions also have different practices; see Insurance for State-Chartered Credit Unions for more on related topics.
Everyone is entitled to one free annual credit report from each bureau, so take advantage of that right to check for errors and differences across reports. For a fee, consumers can also access score estimates online.
How to improve your score
- Keep all payments current and make up any missed payments as soon as possible.
- Pay obligations on time; consistent on-time payment history is the single most important factor for many scoring models.
- Maintain low balances on credit cards and other revolving accounts to lower your utilization ratio.
- Pay down debt steadily rather than repeatedly transferring balances to new accounts.
If you have questions about interpreting reports or improving your standing, Ask our agents about approved sites and common errors to watch for when reviewing your credit information.
Frequently Asked Questions
How often can I get my credit report for free?
You are entitled to one free report each year from each of the three major credit bureaus; spacing them throughout the year can help monitor changes more frequently.
Will checking my own credit score hurt my score?
Regularly checking your own report through a consumer or soft inquiry does not harm your credit score; only certain lender-initiated hard inquiries can affect it.
How long do late payments stay on my report?
Late payments and most negative items generally remain on credit reports for up to seven years, though their impact lessens over time as you build positive history.
What should I do if I find an error on my credit report?
Dispute the error with the reporting bureau and the creditor in writing, provide supporting documentation if available, and follow up until the dispute is resolved.