5 factors that affect your credit score

Building good credit starts with knowing how credit scores break down. (iStock)

Your credit score is a three-digit number that lenders use to gauge how responsible you are financially. If you're applying for a loan or line of credit, your score can play a big part in whether you get approved.

Continue Reading Below

Checking your credit score regularly can help you improve it over time. When reviewing your score, it helps to know what's affecting it, either positively or negatively. These five factors work together to determine your credit score.

1. Bill payment history

Bill payment history simply means how often you pay your bills on time. It's the most important factor that affects your credit score.

FICO credit scores, which are used by 90 percent of top lenders for credit decisions, base 35 percent of your score on payment history alone. Paying on time can help boost your score; paying late can cost you points.

2. Amount of debt

The amount of debt you're carrying comes in second after payment history, accounting for 30 percent of your FICO score. This factor is also called credit utilization or credit usage, which is another way of saying how much of your available credit limit you're using at any given time.

HOW FICO'S NEW CREDIT SCORE CHANGES WILL AFFECT YOU

There's an excellent reason why just two slices of the FICO pie represent 65 percent of your credit, said Howard Dvorkin, certified public account and finance expert at Debt.com. "If you can't pay your bills on time and if you're maxed out on your credit limits, there's a good chance you're a bad risk."

3. Credit history length

Your credit history or credit age makes up 15 percent of your FICO credit score. This factor measures how long you've been using credit.

A longer credit history works in your favor for credit scoring. That's why it's always important to think twice about closing old credit accounts since it can shorten your credit history.

4. Credit inquiries

A hard credit inquiry means that someone has requested a copy of your credit report.

HOW FED'S EMERGENCY RATE CUTS AFFECT YOUR CREDIT CARD

Inquiries make up 10 percent of your credit score so it's important to be selective with how often you apply for credit. Each new hard inquiry can knock a few points off your score.

5. Types of credit

Last but not least, your credit mix accounts for 10 percent of your credit score. This just means the various types of credit you're using, such as student loans, a car loan and credit cards.

Having a diverse mix of credit accounts can be a good thing, since it shows lenders you know how to use different kinds of credit responsibly.

Types of accounts that impact credit scores

There are two types of credit accounts that can affect your scores: revolving credit and installment debt.

Revolving credit means you have a credit limit you can borrow against over and over again, as long as you're making your minimum monthly payments against the balance. A credit card is the best example but a line of credit can also be revolving.

UNEXPECTED CREDIT REPORT ITEMS SHOWING UP? THIS COULD BE WHY

Installment debt usually involves borrowing a set amount of money that's then repaid according to a schedule set by the lender. The balance doesn't go up, since you can't make any new charges against your credit limit. Mortgages, car loans, and student loans are all examples of installment debt.

The most commonly reported credit accounts include:

  • Credit cards
  • Lines of credit
  • Home equity loans
  • Car loans
  • Personal loans
  • Student loans
  • Mortgage loans

Other accounts, such as utility bills or rental agreements, can affect your credit score but only if your payments are reported to the credit bureaus.

What doesn't affect your credit score?

There are a few things that have no impact on your credit score whatsoever. Here's what won't hurt or help your score:

  • Your race, color, religion, national origin, sex, marital status or age.
  • Your salary, employment history, occupation or job title.
  • Where you live.
  • Interest rates you're paying on any of your credit accounts. 
  • Child support or domestic support obligations. 
  • Soft credit inquiries, including you checking your own credit report. 
  • Information that's not predictive of your future credit performance.
  • Credit counseling you're receiving. 
  • Any accounts that aren't reported to the credit bureaus. 

Bottom line, when it comes to credit scores it's all about how--and how much--you spend. And there's no real mystery to raising your credit score.

"Pay your bills on time and pay down your big balances," Dvorkin said. "You do those two things and you've improved nearly two-thirds of your credit score."