The Biggest Impact On Your Credit Score – Top 5
What factor has the biggest impact on your credit score?
Ready to stop struggling to get approved for cars and other loans by building your credit and want to know the impact on your credit score each factor has to know where to start? Then keep reading
There is so much information that goes into calculating a credit score. It seems like everywhere you go, people are using your credit score to decide your fate. Understanding what affects your credit score can help you make smarter financial decisions and improve your financial health. Let’s break it down and see how you can use this knowledge to boost your credit score!
Table of Contents
- The 5 Factors Affecting Your Credit Score
- The Factors That Have the Biggest Impact on Your Credit Score
- The Impact of New Credit on Your Score
- How Credit Mix Impacts Your Credit Score
- Length of Credit’s Impact on Your Credit Score
- Did You Know Your Total Debt Has An Impact on Your Credit Score?
- The Biggest Impact on Your Credit Score
- How Budgeting Can Help You Use These Impacts in Your Favor
- FAQs
Key Takeaways:
- There are 5 factors that affect your credit score most
- Each of these 5 factors has a different impact on your credit score
- You can work backward to know what will help you build your credit score fastest and maintain it healthy
- Use the tips we provide you for each factor to help you build and maintain your credit score
The 5 Factors Affecting Your Credit Score
Your credit score is like a financial report card. Five key factors determine your score. Previously, we created a video that broke down those factors. Just in case you haven’t watched our video on the factors affecting your credit, I’ll do a quick summary
1. New Credit
2. Types of Credit or Credit Mix
3. Length of Credit or Credit Age
4. Total Debt
5. Payment History
If you’d like to go a little more in-depth to understand these better, check out this article: Top 5 Factors Affecting Your Credit Score
The Factors That Have the Biggest Impact on Your Credit Score
We are going to rank those 5 factors from the least impact to the largest impact they have on your credit score. You’ll also see how there is a timeframe that each of these factors sticks around for.
Once you see the true impact of these 5 factors, you’ll be able to know exactly what you need to do to build your credit and keep it strong. Plus, we’ll be providing some tips on how you can control each factor.
The Impact of New Credit on Your Credit Score
Impact: 10% of your credit score or 5-10 points per inquiry
When you apply for new credit, it affects your score by 10%. While it might seem small, too many new applications can hurt your score.
Time: 2 years
Any new applications will stamp your credit report for the next two years. Every other lender will be able to see this as well and will have an idea of all the places you may have been denied.
Tips:
- Apply Wisely: Only apply for credit when necessary and when you plan on buying within that week. You have a shopping window provided to you by the bureaus but don’t drag it out to the end.
Timing Matters: Align major credit applications with significant purchases, like buying a house. Hold off on applying for any other credit until you’ve got your home.
How Credit Mix Impacts Your Credit Score
Impact: 10% of your credit score.
This technically ties with New Credit with the same impact percentage of 10%. Having a mix of credit types is important. This includes revolving credit (like credit cards) and installment credit (such as car loans). It is important to not just have one type of credit only, companies like to see that you can handle different types of credit.
Time: N/A
Your credit mix is not weighted directly off of time. It represents how well you can handle different types of loans. The more types of loans you have and the longer you’ve had them will impact your credit score in a greater way.
Tips:
- Balance: Maintain a mix of both revolving and installment credit.
- Avoid Unnecessary Credit: Only open new accounts if needed. This is important. Even though a mix is desirable, taking out loans or lines of credit unnecessarily is not the answer. Just because it is available, doesn’t mean you need it.
Length of Credit Impacting Your Credit Score
Impact: 15% of your credit score
A longer credit history is beneficial. It shows lenders that you’ve been managing credit responsibly for a long time. A lot of people open and close credit lines and accounts often and this can negatively impact your credit without you realizing it even matters.
Time: Up to 10 Years
When you close an account, it removes all of the positive impact of it. However, any negative impact related to it can stay lingering around for up to 10 years.
Tips:
- Keep Old Accounts Open: Even if you don’t use them, keeping old accounts open and in good standing helps your score. Unless they come with a fee, they will not hurt you to keep open. Actually, they will help you. But if they are causing you problems, such as you keep racking up a huge credit card bill for things you don’t need just because it is open, probably best to close that one out. Remove the temptation.
Manage Installment Loans: You can also consider keeping installment loans open for a while after paying them off. You could keep them 6 months or even a year, this will provide you with a longer payment history and a good history.
Did You Know Your Total Debt Has An Impact on Your Credit Score?
Impact: 30% of your credit score
Your total debt plays a big role. Keeping your debt under control is crucial for a good credit score. Companies do not want to see you are overextended. Even those with stellar credit scores would be a risk to a creditor if they start reaching that overextended amount.
Best way to think about overextending your debt is standing in a pool and not knowing how to swim. If the water is at your ankles, you are a whole lot less likely to drown. But if you walk deeper and that water is up to your mouth, that is a dangerous spot to be in. Your debt needs to stay at your ankles.
Time: N/A
Total debt does not impact your credit score based on time. It is a calculation of how well you can balance your loans and how dependent you are on them. This can cause your score to improve or drop very quickly.
Tips:
- Stay Below 30%: Keep your credit card utilization below 30% of your limit. This means if you have a credit limit of $1,000, you should not use more than $300 (or 30%) of it at a time. The lower your usage, the better your score will be.
Monitor Debt: Regularly check and manage your total debt.
The Biggest Impact On Your Credit Score
Impact: 35% of your credit score!
Payment history is the most significant factor. It shows how reliably you pay your bills over an extended period of time. Your past behaviors matter the most. If your history shows multiple late payments, repos, charge-offs, companies can probably expect that the same will happen again. You have to show them it won’t.
Time: Up to 10 years
Late and missed payments will be stamped on your credit history for 7 years for all lenders to see. This is a massive negative impact on your credit score that needs to be avoided. However, it doesn’t stop there.
Any form of repossession, charge-off, or being sent to collections will also linger around for 7 years. If this gets to the point where your only option is to file for bankruptcy, you will have a ‘dark cloud’ that follows you around, negatively impacting your credit score for 10 years.
Tips:
- Pay On Time: Make all payments in full and on time. Late payments matter just as much as no payment.
Use Tools: Set reminders and automate payments to avoid late fees. Contact the companies you owe when something comes up to see if they can work with you instead of just not paying.
How Budgeting Can Help You Use These Impacts in Your Favor
Budget is not a bad word, though a lot of people treat it as it is. Budgeting is a way to take control over your finances and shows you the areas that need the most attention. Your credit score is just a representation of your overall financial stability and the foundation is a strong budget.
Without a way to know where your money is really going each month, you are leaving it up to chance and hoping it will all work out. OR that you have no control. If you aren’t sure where to start with a budget, we can help. For a step-by-step on building a solid budget that will lead to great credit, check out this video right here.
1. What happens to my credit score if I miss a payment?
Payment history is the most crucial factor, accounting for 35% of your score. Missing a payment can significantly hurt your credit score. Even one late payment can stay on your credit report for up to 7 years, making it harder to get approved for loans or credit cards in the future. The more payments you miss, the greater the negative impact.
2. How can I build credit if I don’t have any credit history?
Building credit from scratch takes time and responsible credit use. Here are a few options:
- Secured Credit Card: These cards require a deposit that acts as your credit limit, making them easier to get approved for. Use it responsibly and pay it off on time to build a positive credit history.
- Authorized User/Co-Signer: Ask a trusted family member or friend to add you as an authorized user on their credit card or as a co-signer on a loan they are taking out. Their responsible credit behavior can positively impact your credit report.
- Credit-Builder Loan: These small loans are designed to help you build credit. You make regular payments, and the lender reports your activity to the credit bureaus.
3. Does checking my own credit score affect it?
No, checking your own credit score is considered a “soft inquiry” and does not affect your credit score. You can also use apps like Experian or Credit Karma to keep tabs on your credit score on an ongoing basis.
4. Will closing a credit card hurt my credit score?
Closing a credit card can potentially hurt your credit score, especially if it’s an older account or one with a high credit limit. Closing a card can shorten your credit history length and increase your credit utilization ratio, both of which can negatively impact your score.
5. How can I improve my credit score if I have bad credit?
Focus on these key strategies:
- Make on-time payments.
- Reduce your credit card debt.
- Don’t apply for any new loans.
- Dispute any errors on your credit report.
- Pay off previous accounts in collections.
6. How long does it take to improve my credit score?
The time it takes to improve your credit score depends on your current situation and the actions you take. There are people who see improvements within a month by catching up accounts, reducing credit card debt, and paying off accounts in collections. However, significant improvements can take longer. The biggest thing to remember is that building your credit is more about developing the habits that will allow you to maintain your score healthy, long-term. This is a marathon, not a sprint. Stay patient, consistent, and focused on making good financial choices and you’ll see a drastic change in your life.
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Disclaimer: The information provided in this article is for educational purposes only. It is not financial advice. Always consult with a qualified financial professional for personalized guidance.
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