Factors affecting your credit score: what you need to know

A credit score is a three-digit number that represents your creditworthiness based on your past credit behavior. Lenders use this score to determine your eligibility for mortgages, personal loans, credit cards, and other types of credit, as well as the interest rate you’ll be charged. Credit scores range from 250 to 900, with higher scores indicating lower risk and better loan terms.
Factors in Calculating Credit Score
Understanding the factors that influence your credit score can help you maintain or improve it. Here are the main components:
- Payment History (45%)
- Your payment history is the most critical factor. It shows how reliably you’ve managed credit in the past, including credit cards and loans. Consistently making payments on time boosts your score, while late payments can significantly lower it.
- Amounts Owed (20%)
- This factor considers the total amount of debt you owe across all your accounts. High levels of debt relative to your available credit can signal to lenders that you might be overextended and at a higher risk of default.
- Types of Credit (15%)
- Having a mix of credit types, such as installment loans (mortgages, auto loans, personal loans) and revolving credit (credit cards, overdrafts), can positively affect your score. It shows lenders that you can manage different types of credit responsibly.
- Length of Credit History (10%)
- The length of your credit history considers the age of your oldest and newest accounts, as well as the average age of all your accounts. A longer credit history generally improves your score because it gives lenders more information about your financial behavior.
- New Credit & Hard Inquiries (10%)
- Hard inquiries occur when you apply for new credit and a lender checks your credit report. Each inquiry can slightly lower your score, especially if you apply for multiple loans or credit cards within a short period. Opening several new accounts in a short time can also be seen as a sign of financial distress.
Maintaining a Healthy Credit Score
To maintain a good credit score, it’s important to:
- Make all your payments on time.
- Keep your credit card balances low relative to your credit limits.
- Avoid opening multiple new credit accounts in a short period.
- Monitor your credit report regularly to check for errors and signs of fraud.