The 3 Main Factors Affecting Your Credit Score

1. Payment history

We all have that friend, the friend who is always late to every event. You love hanging out with them, but you know that when they say, “see you at 7!” they actually mean 7:30, if not 7:45. You know they’ll be late because that’s what has happened in the past. In much the same way, people who have been late on loan payments in the past are more likely to be late on payments in the future.

Payment history is the most important factor that affects your credit score, making up as much as 35% of the credit score calculation, according to FICO. The credit score also considers the trend or pattern of late payments . For example, being more than a month late on a payment may lower your credit score even more than being only a few days late.

The best thing you can do is avoid late payments altogether. If you have made late payments in the past, don’t worry. You will have the opportunity to amend a late payment history through a new timely payment behavior that will have a favorable impact in your current credit score. As time goes by, you will realize that the good way you’re managing your finances today is as much important as how you managed your finances years ago. As in love and in credit scores, time really does heal all wounds.

2. How much you owe

It simply makes sense that people who have more debts are more likely to have problems paying them all back. For this reason, how much you owe to creditors, and to how many creditors you owe money, is a factor that makes up about 30% of your credit score.

One thing that really affects your credit score is something called “credit utilization,” which measures how much you have borrowed as a percentage of how much you could borrow if you wanted to. For example, if you have a $200 balance on a credit card with a limit of $1,000, you have a credit utilization ratio of 20%.

There are two ways to make sure that this part of your credit score works for you, rather than against you.

Keep your utilization ratio below 50%.

If you have a credit card with a credit limit of $1,000, that means never having an unpaid balance of more than $500. FICO writes on its website that “as a general rule, you want to try to keep your utilization on any one card, and across all of your credit cards, below 50% to avoid the risk of hurting your FICO® score.” A lower ratio is certainly better, as FICO also says that, on average, people who have “exceptional” credit (scores above 800) have a utilization ratio of about 7%.

Avoid having balances on multiple accounts.

It can be better to have a $1,000 balance on one credit card than to have $200 balances on five different cards. FICO says that “a larger number of accounts with amounts owed can indicate higher risk of over-extension,” which is why having balances on multiple accounts can hurt your score.

One way to get a quick boost to your credit score is by prioritizing payments on small balances. If you have a card with a $50 balance and another with a $3,000 balance, it may make sense to pay off the smaller balance as soon as possible, since you’ll reduce the number of accounts on which you carry a balance. Likewise, consolidating credit card debt to one credit card, or into one personal loan, can be a really good way to reduce your credit utilization and improve your credit score.

3. How long you’ve had credit

Having a bad credit score is…well, bad, but even more having limited credit history or no credit at all is also important. Without credit history, lenders have no way to foresee or have an idea whether you will pay back a loan on time. The more credit history you have, the better, since the age of your credit history affects about 15% of your credit score.

In this sense, think of a credit score or credit report as a financial résumé. If you were hiring someone for a job, would you prefer someone with 10 years of experience or just one year? Most people would probably choose to call the more experienced person in for the first interview.

For credit scoring purposes, the age of your credit history is measured in two different ways:

The age of your oldest account

For most people, the oldest account is a credit card opened at a young age and kept open for years thereafter. Always try to keep your oldest accounts active when it’s reasonable to do so. Often, that means making just one purchase on an old credit card once a year, and paying it off immediately, so that the card remains open. (Banks typically close accounts when they are inactive for a year or longer.)

The average age of all your accounts

Opening new accounts frequently can reduce the average age of all your accounts. Sometimes, this is unavoidable -- if you need money to buy a car, there’s no way around taking out a car loan. But to maximize this part of your score, avoid opening accounts you really don’t need. It may make sense to take out a loan to consolidate debts if you can save hundreds or thousands of dollars in interest, but opening a new store credit card just to save $5 on a pair of pants might not be a wise decision for credit scoring purposes.

This part of your credit score is really all about avoiding easy mistakes. Don’t unnecessarily close old accounts, and avoid opening a bunch of new accounts in a short period of time, and you’ll do just fine.

The Bottom Line

While your credit score is extremely important in getting approved for loans and getting the best interest rate available, you don't need to obsess over every single detail in your report. In general, so long as you manage your credit responsibly, you should have nothing to worry about. If you are planning on making a large purchase that will require you to take out a loan, best practice is to check your credit score about six months in advance. This will give you enough time to correct any possible errors and, if necessary, improve your score.