Factors Affecting Your Credit Score

A credit score is a mathematical calculation that helps a lender or other creditor determine whether you will be a safe risk in paying back money that you want to borrow. Yet according to a survey conducted by the Consumer Federation of America, at least 40 percent of Americans do not know their credit scores (see Reference 1). There are several basic factors that affect a person's credit score, thus influencing the ability to qualify for a mortgage loan, auto loan, credit card or any other form of credit.

Current Debt

Creditors look at how much debt you owe compared with how much credit you have available. This accounts for about one-third of your credit score. One way a person can improve his credit score is to pay down any loans or credit card balances. A good rule of thumb to follow when it comes to using credit is not to borrow more than 35 percent to 40 percent of the credit available to you. Maintaining low balances is viewed more favorably than using up your credit limit. It is never wise to overextend your credit.

Payment History

Whether you pay your bills on time is probably the single most important factor affecting your credit score. Payment history generally accounts for 35 percent of a person's credit score. Creditors are more likely to consider you as a safe risk if you never miss making a payment. Having past due bills go to a collection agency or a bankruptcy on your record can significantly affect your credit score. Your credit score will also be adversely affected if you have a history of repeatedly missing payments.

Types of Credit

Creditors look at the types of credit you use. If you use credit from different sources such as a bank loan and credit card, your credit score will actually be higher. Qualifying for a mortgage loan is one of the best types of credit you can have. Stay away from borrowing money from finance companies as this can negatively affect your credit score. The high interest rates charged by these companies often affect an individual's ability to make payments on time.

Length of Credit History

The longer you maintain a good credit history, the higher your credit rating will be. A lengthy credit history shows creditors that you have continued to make payments to your creditors despite any problems you might have had. Not paying late indicates to creditors that you have responsibly managed credit over time.

Number of Credit Applications

It surprises some people to know that how often you apply for credit impacts your total credit score, especially if you are applying for a loan. Submitting multiple credit applications at the same time can send the message to creditors that you need money.

Dispelling Myths

Your age and income cannot affect your credit rating. Employment is listed among the personal information included on a credit report, but it cannot lower your score. Likewise, since income is not factored into the calculation, earning a higher income will not increase your credit score. You can improve your credit score by making your payments on time, not charging huge balances on your credit cards even if you pay them off in full each month, or applying for more credit that you don't need.