Matters of Money

What Affects Your Credit Score

credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bureaus.

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Digital finance companies such as online lenders also use alternative data sources to calculate the creditworthiness of borrowers.

Knowing your score is the first piece of Intel you need in order to make smart financial decisions, but understanding how that score is derived and what financial behavior affects your score is the key to owning your financial health.

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The importance of understanding

what affects your credit score

When you understand what affects your credit score, you can make better decisions to improve your credit score.

The chart below demonstrates that the majority of Americans struggle with their credit. So, for many, there’s room for improvement—and understanding how the decisions you make can help or hurt your score is a step in the right direction.

U.S. Population Categorized by the Five FICO Ranges for Credit Scores

Source Credit Sesame 



What affects your credit score?

The best way to formulate a strategy to maintain or improve your credit score is to learn what’s in your credit report as well as what – and how – this information affects your credit score.

Your credit report contains four pieces of information: identifying information (name, addresses, Social Security number, date of birth and employment); “trade-lines” or lines of credit (car loan, mortgage, credit cards, store cards), including your credit limit and payment history; credit inquiries (which lenders have requested your credit report); and public records or collections (court records, overdue debts, bankruptcies and civil lawsuits).

Analyze Your Free Credit Report

Explore your free credit report card from Credit Sesame to get an understand of what parts of your credit profile is impacting your credit score the most.

Does canceling a credit card affect your credit score?

Closing a credit card can impact two important credit factors: your credit utilization and the average age of your credit accounts. If you’re trying to improve your credit, you might feel inclined to close a credit card after you pay off the debt —because it’s less debt, right? Actually, this would hurt your score.

Your credit utilization is the ratio of the credit available to you to the credit you’re using. For example, if you have a $5,000 credit line on a credit card and you’ve charged $2,000, your credit utilization ratio is 40 percent. When you close a credit card, the credit available to you decreases, which can have a negative impact on your score. It’s better to keep the card open and maintain a balance that is lower than 30 percent of the available credit. If you don’t think you can trust yourself not to use the card after you pay it off, though, closing it won’t remove it from your credit report right away. A closed credit card will stay on your credit report for seven years.

Similarly, if you’ve had the card for a long time, this can negatively impact the age of your credit, which would negatively affect your score.

If you recall, most consider good credit utilization to be less than 30 percent of your available credit, which makes up 30 percent of your overall credit score. When we look at Credit Sesame members with good utilization, the average credit score is 646. However, when members increase their utilization to over 30 percent, we see the credit score decrease to 598.

Does checking your credit affect your credit score?

There are two different types of credit pulls —a soft pull or inquiry and a hard pull. A soft pull will have no impact on your score. When you look at your own credit report, it’s considered a soft pull. An employer doing a background check is another example of a soft pull.

A hard pull is when a lender requests your full credit report based on your application for credit. This is how they judge whether or not to extend you credit. Hard pulls do have an impact on your credit score, but not much. Additionally, these hard pulls stay on your report for two years but are only factored into your score for one year.

The number of inquiries you have on your credit report makes up 10 percent of your credit score. We can see from the chart below that having many inquiries lowers the credit score.

Do late payments affect your credit score?

The short answer is yes. Making payments late is the fastest way to tank your credit score. Late payments are weighted differently depending on how late they are. For example, a payment that is 120 days late is worse than one that is 30 days late. It can take more than a year to recover from just one missed payment.

Payment history accounts for 35 percent of your score, making it the most important factor in calculating the credit score. When we look at Credit Sesame members with good payment history, the average credit score is 646. However, having a poor payment history drops the average credit score to 598.

Benefits of learning what affects your credit score

When you take the time to understand what affects your credit score, you’re taking the first steps toward having better control over your finances. Your credit score is so much more than just a number; rather, it can be thought of as a living, breathing thing. It is constantly changing, reacting to the ever-changing information that can be found in your credit report, and it needs to be tended and taken care of.

Your credit score and your credit health have a tremendous impact on your everyday life — in ways, you may not even think of. A lower credit score can cost you a significant amount of money in additional fees and interest charges — that’s a given. But a lower score can also cause you to pay higher car insurance premiums in some states, lose out on an apartment you’ve been eyeing, or even be rejected for your dream job. By understanding what affects your score, you’ll know what steps to take to monitor and improve your score.

Conclusion & summary

Negative Factor Avg. Drop Avg. Score
Account charged off 75 525
Credit collections 55 545
Loan default 65 565
Filing bankruptcy 85 530
Home foreclosure 95 520
Paid judgement 45 685
High credit uttlization 10 710
Closing credit card 15 685

Source Credit Sesame 

Whether you’re simply trying to gain a better understanding of how your credit score works or you’re interested in improving your credit, knowing what affects your credit score is your starting point. By understanding what impacts your credit score and the effects these factors have, you can better diagnose what steps to take to either maintain or improve your score—and to make smart financial decisions.