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If you’re looking to build or rebuild credit, focusing on the factors that influence your credit is key. Whether you plan on renting an apartment, buying a car or opening a credit card, lenders will look at your credit score and how well you manage five main factors.
A FICO® Score is used in over 90% of lending decisions, according to the company’s website. When you apply for a new credit card, loan or mortgage, odds are the lender will pull your FICO® Score. FICO lists five key factors that affect your credit score, and we’ll review each factor so you can familiarize yourself with the actions that can impact your credit.
We recommend checking your credit score before you apply for a new credit account. While many banks and websites allow you to check your credit score for free, they may not offer a FICO® Score. Find out where you can check your FICO® Score for free on MagnifyMoney.*
Find out what FICO® Score is considered good.
5 elements of a FICO® Score
Your payment history is 35% of your credit score, which is the largest factor influencing your score. Your FICO® Score looks at whether you’ve made past payments on time, as well as the specifics surrounding any late payments, such as the length of time the payment has been past due, the number of late payments and the size of the late payment.
“[Payment history is] one of the most important predictors if you’ll make your payments on time in the future,” said Tommy Lee, principal scientist at FICO.
It’s very important you maintain a good payment history across all credit products, such as credit cards and personal loans. This is important to building a good or excellent credit score, as well as preventing late payment fees and interest charges. A simple way to ensure timely payments is to set up autopay, even if it’s just for the minimum amount due.
The second most important factor of your credit history, at 30%, is amounts owed, also known as credit utilization. This is the percentage of credit you’re using across all accounts. Simply add up the balances on all your credit cards and divide by the total credit limits across all cards.
For example, if you have one card with a $7,000 credit limit and $2,500 balance and another card with a $3,000 limit and $500 balance, you’d have a combined $3,000 balance and $10,000 credit limit, resulting in a 30% utilization rate. While experts generally agree that a 30% credit utilization is ideal, this is a myth, Lee said.
“There’s no hard-and-fast rule related to utilization,” Lee said. “It’s simply that lower is better.”
But research from FICO showed that “high achievers” — consumers with credit scores of 750 and above — maintained an average 7% utilization rate.
That doesn’t make 7% the “magic number” to achieve the best utilization rate. If you continually max out your credit cards, you’ll wind up with a high credit utilization. The higher your credit utilization, the less likely issuers are to approve you for new credit accounts or credit limit increases.
Length of credit history
How long you’ve had credit makes up 15% of your credit score. This takes into account several factors, including the age of your oldest account and the average age on all your accounts, Lee said.
If you opened credit cards in 2005, 2010 and 2018, the average length of time you’ve had credit is eight years. Each time you open a new account, your average length of credit history drops. Since opening new accounts decreases the length of your credit history, try to only open accounts as needed.
“High achievers” have an average credit history of 11 years, managing their oldest account for 25 years, according to FICO research. But if you’re not a “high achiever” and instead have a short credit history, that doesn’t mean your credit score will suffer.
“Since this length of credit history only makes up 15% of the score calculation, if a consumer does well in the other categories … they can absolutely have a high FICO® Score,” Lee said. This can be hopeful for credit newbies who excel in the other categories that contribute to a FICO® Score.
The amount of new credit you apply for and open is 10% of your credit score. While this is one of the smallest factors of your credit score, it shouldn’t be overlooked. Each time you apply for a new credit product, an inquiry appears on your credit report whether you’re approved or denied. That means if you apply for two credit cards but you’re approved for one, there will be two credit inquiries on your credit report.
If lenders see too many inquiries or new accounts opened, they may deem you a risk and deny your request for credit. There’s a silver lining, though. While inquiries remain on your credit report for two years, FICO® Scores only consider inquiries from the past 12 months.
Consumers should only apply for new credit as needed, Lee said. It can be a good idea to shop around for offers with pre-qualification tools. Pre-qualification doesn’t affect your credit score and allows you to compare multiple offers. Beware that once you submit an actual application, a hard credit pull will be performed, resulting in an inquiry.
The various types of credit accounts you have opened make up 10% of your credit score. According to FICO’s website, this includes credit cards, retail accounts, installment loans, finance company accounts and mortgages. You may be wondering if specific types of credit accounts have a greater chance at improving your credit score, but that’s not necessarily true.
“It can be beneficial for consumers to have a revolving account and an installment account … [but] it is more important to be able to manage all of your accounts responsibly and pay your bills on time than to ensure you have specific types of accounts,” Lee said.
While credit mix is a minor factor of your credit score and various accounts aren’t required, maintaining a diverse range of credit accounts can show lenders that you know how to manage different credit products.
If you’re looking to rebuild your credit score, consider the Petal Visa® Credit Card.
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