10 Things That Can Impact Your Credit Score

Updated on 02/16/2024

10 Things That Can Impact Your Credit Score

Understanding how credit reports work is super important if you want to be smart about your money in the future. Think of your credit score as a grade that banks and lenders look at to decide if they want to lend you money and how much interest they’ll charge you. The better your credit score, the easier and cheaper it often is to borrow money for things like a car or a house.

Your FICO or Experian credit score is determined by a few things, like whether you pay your bills on time, how much of your available credit you’re using, and how long you’ve had credit. Making good money moves, like always paying bills on time, can make your score go up while slipping up and missing a payment can make it drop. 

Knowing what makes your credit score tick can help you make smart choices to keep your score high or improve it.

The Building Blocks of a Credit Score

Before exploring the impacts, it’s crucial to understand what a credit score is. Your credit score, a number typically ranging from 300 to 850, reflects your credit risk. The higher the score, the lower the risk to lenders. 

This score is calculated based on information in your credit reports, which track your credit activity and payment history. Key players in determining your credit score include FICO and Experian, among others, who analyze your credit reports to assign your score.

By paying attention to the factors that can positively and negatively impact your credit score, you can be better equipped to navigate the financial landscape, ensuring your credit score helps rather than hinders your financial goals.

Positive Impacts on Your Credit Score

1. On-time Payments

Making payments on time is crucial for a healthy credit score. This factor alone accounts for a significant portion of your FICO score calculation. Consistency in on-time payments over time can lead to substantial improvements in your credit score, showcasing your reliability to future lenders.

2. Credit Utilization Ratio

A low credit utilization ratio is seen as a positive indicator by credit scoring models. It suggests that you are using credit responsibly and not over-relying on it for your financial needs. Experts recommend keeping your utilization below 30% of your total available credit across all accounts. Reducing balances, managing spending, and requesting a credit increase can help improve your credit utilization ratio, thus boosting your credit score.

3. Diverse Credit Mix

Various credit types (such as installment loans, credit cards, and mortgages) demonstrate to lenders that you can handle different types of credit responsibly. This diversity can positively impact your credit score by showing you have experience managing a mix of credit products. However, it’s important to only take on credit you can afford to repay to avoid potential financial strain.

4. Length of Credit History

The age of your credit accounts plays a significant role in your credit score. Older accounts contribute to a longer credit history, positively affecting your score. Keeping older accounts open and in good standing can provide a more accurate picture of your long-term financial behavior and creditworthiness.

5. Credit Inquiries

While this is more about minimizing negatives, it’s worth noting that not all inquiries are the same. Soft inquiries, such as when you check your own credit score, do not affect your credit. In fact, regularly checking your credit score is a positive habit. It allows you to monitor your credit health, understand the factors affecting your score, and make informed decisions to improve it. Free credit score check services can empower you to take control of your credit without negatively impacting your score.

Negative Impacts on Your Credit Score

6. Late or Missed Payments

Payment history is a significant component of your credit score, often accounting for the largest percentage of the score calculation. Even a single late payment can cause a substantial drop in your score, and the impact can increase with the severity and frequency of late payments. 

Late payments can stay on your credit reports for up to seven years, serving as a long-term reminder of financial missteps. It’s essential to catch up on missed payments quickly and, if possible, reach out to creditors to see if any arrangements can be made to minimize the damage.

7. High Credit Utilization

Utilizing a high percentage of your available credit signals potential risk to lenders and can negatively affect your credit score. High utilization can indicate that you’re overly reliant on credit or experiencing financial difficulties, making you a higher risk for lenders. 

This is particularly true if you consistently carry high balances across your accounts. Paying down balances and keeping them low can help reverse the negative impact of high credit utilization on your score.

8. Closing Old Credit Accounts

While it might seem like a good financial housekeeping move, closing old credit accounts can shorten your credit history and negatively impact your credit score. This is because closed accounts may eventually fall off your credit report, potentially reducing your average account age and diminishing the credit history length that creditors like to see. Additionally, closing accounts can increase your overall credit utilization ratio by reducing your total available credit.

9. Collections and Bankruptcies

Accounts being sent to collections or declaring bankruptcy are among the most severe negatives for a credit score. These actions indicate serious financial distress and can drastically reduce your score. 

Collections can result from unpaid debts, including credit cards, medical bills, or loans, and can remain on your credit report for seven years. Bankruptcies can stay on your report for up to 10 years, depending on the type, making it challenging to obtain new credit during that time.

10. Frequent Credit Applications

Each time you apply for credit, a hard inquiry is made on your credit report, which can slightly lower your credit score. While one or two credit check inquiries won’t have a major impact, several applications within a short period can significantly hurt your score. This is because it may appear to lenders that you’re desperate for credit or planning to take on a significant amount of debt, increasing your risk as a borrower.

Tools and Strategies for Credit Management

The next step is to manage your credit to maintain or improve your score actively. Regularly do a credit score check and review the details on your report. If you’re wondering, “How do I check my credit score?” you can access a free credit report annually from each of the major credit reporting agencies. 

Strategies to mitigate negative impacts:

  • Set up payment reminders or autopay to ensure bills are paid on time.
  •  Keep credit card balances low and pay off debt rather than moving it around.
  • Think twice before closing old accounts, considering the potential impact on your credit history and utilization ratio.
  • Work with creditors if you’re unable to make payments to avoid collections potentially.
  • Space out credit applications to minimize the number of hard inquiries in a short period.

Here are a few credit building strategies:

  • Credit Boost Services: Some services allow you to add utility and rent payments to your credit file. Since these payments are not typically reported to credit bureaus, using a credit boost service can provide a more comprehensive view of your financial responsibility, potentially increasing your credit score.
  • Credit Builder Loans: These loans are designed to help individuals build credit. The money you borrow is held in an account while you make payments. Once the loan is fully paid, you can access the funds, having built a history of on-time payments.
  • Secured Credit Cards: These require a deposit that typically serves as your credit limit. They’re a useful tool for building credit when used responsibly, as activity on these cards is reported to credit bureaus just like traditional credit cards.
  • Authorized User Status: Becoming an authorized user on someone else’s credit card can also help build your credit. If the account holder has a history of on-time payments and a low credit utilization ratio, this can positively impact your credit score.

Remember, improving or maintaining a good credit score is a marathon, not a sprint. It requires consistent effort and financial discipline.

By Admin