5 Factors that Affect Credit Scoring

In today’s world, credit scores have become an essential aspect of our financial lives. Whether you’re applying for a loan, a mortgage, a credit card, or even renting an apartment, your credit score can play a crucial role in determining the terms and conditions you’re offered. With this in mind, it’s essential to understand the factors that impact your credit scoring to ensure a healthy financial standing.

In this article, we’ll explore five critical factors that can either bolster or hinder your credit score, giving you a comprehensive understanding of how to manage your financial health.

Credit bureaus compile this number using complex algorithms that weigh multiple factors in your credit history. These factors help lenders assess the likelihood of you repaying the borrowed money, and as such, directly impact the approval, interest rate, and terms of any credit you seek. Consequently, having a good credit score can save you thousands of dollars over time and open up more financial opportunities.

Knowing which factors contribute to your credit score is vital in managing your credit responsibly and working towards an improved score. Let’s dive into the five factors that most significantly impact your credit scoring, along with tips on how to optimize each one for a healthier credit profile.

By understanding these factors, you can take control of your financial future and work towards securing better credit opportunities.

What is Credit Scoring?

Credit scoring, which is reported as a credit score, a three-digit number, is a representation of an individual’s creditworthiness. Financial institutes, credit card issuers, and potential lenders will use this to evaluate the risk associated with extending credit to that person. It is a crucial tool in the world of finance, as it helps lenders, such as banks, credit card companies, and other financial institutions, make informed decisions when offering loans, credit cards, or mortgages.

A higher credit score typically indicates a lower risk for the lender, meaning that the borrower has a history of managing their credit responsibly and is more likely to repay the borrowed amount on time.

Various credit bureaus, such as Equifax, Experian, and TransUnion, are responsible for calculating credit scores using their proprietary algorithms. In the United States, the most widely used credit scoring model is the FICO score, developed by the Fair Isaac Corporation.

A FICO credit score ranges from 300 to 850, with higher scores representing better creditworthiness. Another common scoring model is the VantageScore, developed by the three major credit bureaus as a competitor to FICO. While the credit score ranges for VantageScore are the same, the calculation method and weightage of factors differ slightly from the FICO model.

Credit scoring considers several factors to provide a comprehensive picture of an individual’s credit usage and behavior. These factors, which will be further explained below, include

  • record of one’s payment history (ie. making on-time payments)
  • credit utilization (ie. the amount of revolving credit available vs. how much is owed)
  • length of credit history (ie. how long you have had reported credit)
  • types of credit (ie. personal loan vs. consumer credit)
  • recent credit inquiries (ie. if credit applications have been made)

By maintaining a positive track record in these areas, individuals can build and maintain a strong credit score, enabling them to secure better terms and lower interest rates on future credit products.

What is a Credit Report?

A credit report is a comprehensive document that contains detailed information about an individual’s credit history and financial behavior. Credit bureaus, such as Equifax, Experian, and TransUnion, compile and maintain these reports to provide lenders and other financial institutions with a snapshot of an individual’s creditworthiness. Credit reports play a significant role in the credit scoring process and directly impact an individual’s ability to secure loans, credit cards, and other financial products.

The information included in a credit report can be categorized into four main sections:

Personal Information:

This section contains basic identifying information, such as your name, Social Security number, date of birth, and current and previous addresses. This data helps lenders confirm your identity when reviewing your credit report.

Credit Accounts:

This section provides details about your current and past credit accounts, including credit cards, loans, and mortgages. It lists the type of account, the date it was opened, the credit limit or loan amount, the current balance, and your payment history. This information helps lenders assess your creditworthiness and determine your ability to manage various credit products.

Public Records:

The public records section includes information about any financial legal issues, such as bankruptcies, tax liens, or civil judgments. These events can significantly impact your credit score and remain on your credit report for a considerable amount of time, typically seven to ten years.


This section lists all the recent requests for your credit report, also known as “hard inquiries.” These inquiries occur when you apply for new credit, and multiple hard inquiries within a short period can negatively impact your credit score. Note that “soft inquiries,” such as checking your credit score or prequalification for a loan, do not appear on your credit report and do not affect your credit score.

Regularly reviewing your credit report is essential for maintaining a healthy financial standing. By monitoring your credit report, you can ensure the accuracy of the information, identify any errors or discrepancies, and take steps to rectify any issues that may be harming your credit score.

Under federal law, you are entitled to one free copy of your credit report from each of the three major credit bureaus every 12 months, which you can obtain at AnnualCreditReport.com.

What are the Various Credit Scoring Models?

There are multiple credit scoring models utilized by credit bureaus, credit reporting agencies, lenders, and financial institutions to assess an individual’s creditworthiness. While each model has its unique approach to calculating credit scores, the primary goal remains consistent – to provide an accurate representation of the risk associated with lending to a particular individual. Here, we will discuss some of the most widely used credit scoring models:

FICO Score:

The Fair Isaac Corporation developed the FICO score, which has become the most well-known and widely used credit scoring model in the United States. FICO scores range from 300 to 850, with higher credit scores indicating a lower risk for lenders.

This model considers five primary factors when calculating a credit score: payment history, credit utilization, length of credit history, types of credit in use, and new credit inquiries. FICO scores are used by 90% of top lenders in the U.S., making them an essential aspect of an individual’s financial life.


In 2006, the three major credit bureaus – Equifax, Experian, and TransUnion – introduced the VantageScore as an alternative to the FICO model. The VantageScore also ranges from 300 to 850, but it calculates scores using a slightly different methodology and weighting of factors.

While the factors considered are similar to the FICO model, the VantageScore places more emphasis on recent credit behavior and trends. This model has gained popularity among lenders as it provides a more comprehensive view of an individual’s credit habits.

PLUS Score:

Developed by Experian, the PLUS Score is an educational credit score designed to help consumers understand their creditworthiness. It ranges from 330 to 830, and though it is not used by lenders for credit decisions, it serves as a valuable tool for individuals seeking to learn more about their credit standing.

CE Score:

The CE (CreditXpert) Score is another educational credit score model, which ranges from 350 to 850. This model is used to help consumers understand their credit situation and predict their likelihood of being approved for credit products.

While these are just a few of the many credit scoring models available, it is important to note that each lender may rely on different models or even have their proprietary models for assessing credit risk.

As a consumer, it is crucial to be aware of the factors that impact your credit scores across various models and work towards maintaining a positive credit history to ensure better credit opportunities and terms.

Biggest Factors that Affect Credit Scores

Understanding the factors that contribute to credit score calculations is vital for maintaining or improving your financial health. Here, we will look a bit deeper into the five biggest factors that affect credit scores and subsequent credit reports as well as provide insights into each of these aspects.

Payment History

Payment history is the most influential factor in determining your credit score, accounting for approximately 35% of the total score. This factor assesses how consistently you have made on-time payments on all your credit accounts, including credit cards, loans, and mortgages. Late payments, missed payments, and defaults can significantly damage your credit score and may remain on your credit report for up to seven years.

To maintain a positive payment history, it’s essential to make all your payments on time and in full. Setting up automatic payments, using calendar reminders, or employing budgeting tools can help you manage your finances and stay on track with your payment obligations.

Amount of Debt Owing

The amount of debt you owe, also known as credit utilization, makes up about 30% of your credit score. Credit utilization refers to the ratio of your outstanding debt to your available credit. Lenders use this metric to assess how reliant you are on borrowed money and how well you manage your existing credit lines. A high credit utilization ratio may indicate that you are overextended and could struggle to repay additional debts.

To optimize your credit utilization, aim to keep your balance below 30% of your total available credit limit. Regularly paying down your debt and keeping your credit card balances low can positively impact your credit score.

Types of Credit

Having a diverse mix of credit types accounts for approximately 10% of your credit score. This factor considers the variety of credit accounts you have, such as credit cards, mortgages, auto loans, and student loans. Demonstrating your ability to manage various types of credit responsibly can improve your credit score and make you more attractive to lenders.

While it’s not necessary to have every type of credit account, maintaining a healthy credit mix can showcase your financial stability and ability to manage multiple credit obligations.

Length of Credit History

The length of your credit history contributes to about 15% of your credit score. This factor considers the age of your oldest and newest credit accounts, as well as the average age of all your credit accounts. A longer credit history generally translates to a higher credit score, as it provides lenders with more data to assess your creditworthiness.

To build a solid credit history, avoid closing your oldest credit accounts, as doing so can decrease the average age of your credit lines. Instead, maintain these accounts and use them responsibly to demonstrate a consistent record of good credit behavior.

New Loan Applications

New applications or credit inquiries for a loan or credit card account for roughly 10% of your credit score. Each time you apply for a new credit account, lenders perform a “hard inquiry” on your credit report, which can temporarily lower borrowers’ credit scores. Multiple hard inquiries within a short period may signal to lenders that you are facing financial difficulties or are a high-risk borrower.

To ensure that new loan applications reduce their impact on credit scores, only apply for new credit when necessary, and space out your applications over time. Additionally, consider using prequalification tools that perform “soft inquiries,” as these do not negatively affect your credit score.

Final Thoughts on Credit Scoring

Having a firm grasp of the factors that impact your credit scoring is crucial for achieving and maintaining a healthy financial standing. By focusing on the five key factors – payment history, amount of debt, types of credit, length of credit history, and new loan applications – you can take control of your financial future and work towards a higher credit score.

A strong credit score opens up opportunities for better credit terms, lower interest rates, and increased financial flexibility. By managing your credit responsibly and staying informed about your credit report, you can secure a bright financial future and enjoy the benefits that come with an excellent credit score.

About the Author Tiffany Aliche

Tiffany “The Budgetnista” Aliche, is an award-winning teacher of financial education, America’s favorite, personal financial educator, and author of the New York Times Bestselling book, Get Good with Money. The Budgetnista is also an Amazon #1 bestselling author of The One Week Budget and the Live Richer Challenge series and most recently, a children's book, Happy Birthday Mali More.

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