A Day Late.. but Not a Dollar Short

I felt it was appropriate to be a day late on this week’s post to discuss the various factors that affect your credit score.


Yes, please take a moment to reflect on the irony.

There are essentially five main factors that affect your credit score. For the purposes of this entire post, I am assuming you’re an average consumer. Ranked from most important to least important, they are:

  1. Payment History
  2. Credit usage
  3. Length of credit history
  4. Credit mix and types
  5. Recent credit

Payment History

Having a long history of on-time payments is best for your credit scores, while missing a payment would hurt them. For obvious reasons, the length of time of the delay has a higher impact. For instance, a 30-day late payment would have a less damaging effect than a 60- or 90- day late payment.

The “amount of damage” that is done to your credit for being late on payments would vary depending on how much you owe.

Credit Usage

The amount you owe on installment loans – such as a personal loan, mortgage, auto loan or student loan – is part of the equation. However, even more important is your current credit utilization rate. Your utilization rate is the ratio between the total balance you owe and your total credit limit on all your revolving accounts (credit cards and lines of credit). A lower utilization rate is better for your credit score.

Or in very simple terms – avoid maxing out your credit cards.

Keep in mind that you can pay your bill in full each month and still appear to have a high utilization rate. The calculation uses the balance that your credit card issuers report to the bureaus, often around the time it sends you your monthly statement. You may have to make early payments throughout your billing cycle if you want to use a lot of credit and maintain a low utilization rate.

Length of Credit History

There are multiple factors that play into this one:

  • The age of your oldest account
  • The age of your newest account
  • The average age of your accounts
  • Whether you’ve used an account recently

Opening new accounts could lower your average ago of accounts, which may hurt your scores. It’s also why I always tell people not to cancel their cards. Just leave them in drawer somewhere never to be found again, because you’re still building the length of your credit history and increasing the average age of your accounts. Closing your oldest credit card could have a more dramatic impact on your credit score than you may imagine.

Credit Mix and Types

Having a history of different types of credit, like revolving credit card accounts and installment student loans, may help improve your credit score.

Obviously, don’t take out a loan and pay interest just to add to your credit mix. But if you’ve only ever had installment loans, you may want to open a credit card and use it for minor expenses that you can afford to pay off each month.

Recent Credit

New credit inquiries can stay on your credit reports for up to two years.

Soft inquiries, like those that come from checking your own scores and some loan or credit card prequalifications, don’t hurt your scores.

Hard inquiries, when a creditor checks your credit before making a lending decision, can hurt your scores even if you don’t get approved for the credit card or loan. Multiple hard inquiries in a short period time will impact your credit score.

There is ONE exception to this – multiple inquiries for mortgages, auto loans and student loans from a single 14-45 day period (depending on the loan and credit scoring model) may be treated as a single inquiry when calculating your scores.

One more important bit of information that everyone asks all the time. You are entitled to check each of your own credit scores once per year for free. The correct (read: legit) site for this is: www.annualcreditreport.com

Pro-tip: you don’t have to check all 3 at once. You can choose to check each of the 3 credit reporting agencies at various times of the year and, as such, effectively check your credit for free every 4 months. YOU’RE WELCOME!