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Want to Know What Affects Credit Score? Read This!

what affects your credit score

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Your credit score is a lot more than just a number. It’s a direct reflection of your financial health and has an impact on your ability to get a loan, land an apartment, and even get a cell phone contract!

Many different people look at your credit score and use it to make a decision about whether or not to work with you. Having a poor credit score – or no credit at all – can make things very difficult for you when it comes time to apply for a mortgage, car loan, or personal loan. Even some employers will look at your credit score before hiring you for a job or promoting you to a higher position!

The thing is, there are so many different factors that affect the credit score, some more than others. Some might be pretty obvious, while others you may not have even considered. That’s why it’s so important to know what affects credit score so you can make better decisions that won’t negatively impact it, but, will instead give it a boost.

Before we dive into exactly what affects your credit score, you should pull a copy of your credit report first. You can do this for free once every 12 months with one of the three major credit bureaus, including Equifax, Experian, and TransUnion. There may be other ways to find out what your credit score is, but this report will give you a full picture of what your credit health is like. It will also list all the information that is impacting your score.

Only after you know what your credit score is will you have a better idea of how hard you’ll need to work to get it to a healthy point. Credit scores range from 300 to 850 – the higher the number, the better. A good credit score is considered anything over 700, while a score over 800 is considered excellent. Scores between 680 to 699 are fair.

On the other end of the spectrum, average scores fall anywhere between 620 to 679, low credit score range between 580 to 619, and poor credit scores are anything between 500 to 579.

Armed with this information, you now know where you need to be in order to build good credit and keep it there. The question is, what exactly affects credit score?

1) Missed or Late Payments

The biggest culprit behind bad credit scores is payment history. If you’ve got a nasty habit of missing payments, you can be sure that your credit score will suffer. In fact, 35% of your credit score is impacted by this very thing.

If you’re late paying your bills by a day or two, your credit score won’t suffer. It’s when you’re at least 60 days late that your credit score will be negatively impacted, and if you’re 90 days late, you can bet that your credit score will be significantly affected for as long as seven years.

2) Lots of Debt

The amount of debt that you carry is also one of many significant factors that affect credit score, and the more debt you have on the books, the more it will affect this important number. But it’s not just the amount of debt that you carry, but also the relationship between your outstanding balances and the initial loan amounts.

Having debt balances that are considered too high can be seen as a bad thing, so you’d be doing yourself a favor by paying down your balances.

3) Credit Utilization

“Credit utilization” refers to your outstanding balance on your credit card in relation to your credit limit. The closer your balance is to your credit limit, the higher your credit utilization will be, which is not a good thing. Essentially, credit utilization refers to the amount of your credit limit that you are currently using and is expressed as a percentage.

For instance, if your credit limit is $2,000 and your current balance is $700, then your credit utilization would be 35%. Ideally, credit utilization shouldn’t be any more than 30% of your credit limit, or else it can start to hurt your credit score.

4) “Hard” Credit Inquiries

Whenever you apply for a loan, the lender will check your credit before making a lending decision. The problem with hard inquiries is that they are placed on your credit report to show that you’ve made an application for credit. A couple of hard inquiries won’t do much to your credit score, but multiple inquiries will, especially if you apply for a bunch of loans within a short time frame.

That said, only inquiries that are made within the last 12 months have an effect on your credit score. After 24 months, they’ll be dropped from your credit report.

5) Applying for an Insurance Policy

Not only will applying for credit or a loan impact your credit score, so will applying for an insurance policy. Insurance providers will pull your credit when you apply for a policy, just as lenders do when you apply for a loan. And like credit inquiries done by lenders, those done by insurance providers will count as a “hard” inquiry, which can hurt your credit score.

The same goes for applications for a cell phone plan. When a cell phone provider pulls your credit report, it will be recorded as a hard inquiry on your credit report. And add utilities, cable companies, and landlords to the list, too.

6) Closing a Credit Card

Depending on how much total available credit you have on a credit card, closing one of your cards that has a high credit limit could do a little damage to your credit score. This is especially true if you have high balances on other credit cards or loans. And if you close a credit card that still has a balance on it, your credit limit will be set at $0 but your outstanding balance won’t go anywhere. This will cause your credit score to plummet because it looks as if you’ve maxed out your credit card.

Person cutting up a credit card.
Closing out a credit card that still has a balance can hurt your credit score.

That said, closing out an old credit card shouldn’t have an impact on your score if you have no outstanding balances on your cards and your credit utilization rate is at zero.

7) Judgments or Liens

Serious issues like charge-offs, liens, bankruptcy, collections, foreclosure, and judgments can wreak havoc on your credit score.

8) Changing the Terms and Conditions on Your Credit Card

If you ask your credit card issuer to increase your credit limit, your credit score can take a hit. Again, every time someone pulls your credit report before agreeing to extend credit or enter a contract with you, it will be considered a “hard” inquiry. And that’s just one credit card change that could impact your score.

Any time you ask to change any of the terms and conditions on your credit card — such as a credit limit increase or a reduced interest rate — your credit card issuer will want to make sure such changes are warranted. And in order to do that, they’ll need to pull your credit report. Guess what? That means another hard inquiry on your credit report, which will hurt your score.

9) Mistakes on Your Credit Report

Remember when we suggested that you pull your credit report in order to see what your credit score is and what factors contribute to it? Well, that’s your opportunity to not only see where your score lies, but also to identify any mistakes on the report that are damaging your score.

If you don’t take the time to check your report and scan it for errors, your score could be lower than it really has to be. Don’t just assume that the credit bureaus get it right all the time. They sometimes make mistakes. Unfortunately, those blunders can cost you a few points.

It’s your job to look over your credit report in great detail in order to spot any errors. If you find any, they need to be reported to the bureaus and investigated right away. Correcting these errors can make a difference on your credit score.

Final Thoughts

If you’ve ever asked yourself, “what affects my credit score?” now you know. And you’re probably surprised at how many things can have an impact. But knowing what affects your credit score will help you adopt better habits and avoid certain behaviors that can have a negative impact on this important number.


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