Understanding the factors that make up your credit score

Because your credit score determines so much of your financial life, it is important to understand the logic behind your score fully. Small changes to how and when you pay your debts can make all the difference when trying to build or repair your credit.

A credit score seems complex because there are many factors and models that go into formulating this three-digit number. And each of the three major credit bureaus, Equifax, Experian, and TransUnion, has a different way of coming up with their score.

In our last blog, we discussed why the factors determining your credit score vary based on the scoring model used. Though each scoring model considers many things, four major factors impact your credit score:

  • On-time payments (reflected in the Payment history category)
  • Negative marks (reflected in the Payment history category)
  • Credit utilization (reflected in Utilization, Available credit, Balance, or Amounts owed categories)
  • Open lines of credit (reflected in New credit and Credit mix)

On-time payments

It may seem straightforward, but never underestimate the importance of making on-time payments. Making consistently timely payments will positively impact your credit score. Missing or late payments will negatively impact or lower your credit score.

Now, if you miss a payment by a day or two, you’re usually fine. Credit reporting companies typically look at payments that are 30 days late. Though never ideal, if you make a payment a few days late, there is no need to worry that your credit score will take a major hit.

On-time payments are reflected in the “payment history” portion of FICO® and VantageScore credit scores. 


Negative marks

There are a few actions that will lead to negative marks on your credit score:

  • Overdue payments
  • Collections
  • Bankruptcy

Although they have a significant negative impact on your credit score, overdue payments are often the easiest to fix because all you need to do is pay enough to make your account current. This might mean tapping into your savings to pay back old debts or adjusting your automatic payments so you don’t accidentally miss a payment. 

If needed, you can call the lender and develop a payment plan. Even setting up the plan could mitigate future damage to your credit score.

Collection accounts do damage to credit scores. These are past due payments that are so delinquent (past due) that the company sold the balance to an agency whose only job is to try to collect the money owed. Like overdue payments, you can handle this by calling the agency and getting a lump sum payment or working out a payment plan. Once you correct this, your score will quickly increase over the next few months.

Bankruptcy is a complicated legal process that will reflect on your credit report for several years. While it doesn’t block you from borrowing again, it will give potential lenders a reason to pause. Your credit score will be low for quite a while until you demonstrate that you will responsibly manage credit. This may take years, but it can certainly be done.

Like on-time payments, negative marks are reflected in the “payment history” portion of FICO® and VantageScore credit scores.


Credit utilization

This factor looks at how much of your available credit is being used at any given time. For example, if you have a $100 line of credit and currently have a $10 balance, your credit utilization percentage is 10%.

The idea is to keep this percentage around 25% or so. If you let your credit utilization percentage get too high, it indicates to lenders that you cannot handle debt properly. This lowers your credit score. 

Credit utilization is a big factor in determining your VantageScore credit score, showing up in three categories: Credit utilization, Balance, and Available credit. It’s also a determining factor of FICO® scores, under a category they refer to as Amounts owed.


Open lines of credit

You can have multiple open lines of credit, but you want to be smart about it. Having student loans, a few credit cards, and a car note as open lines of credit can show you can responsibly pay back a good credit mix. If you have dozens of credit cards or store cards open at once, lenders become suspicious. 

Keep in mind that older lines of credit positively impact your credit score. There’s no specific maximum to have open at any time, but the available amount of credit should be reasonable in proportion to your income. Most people find that 5 or 6 lines of open credit are the upper limit before their credit score shows a dip.

You can always close credit cards, but the better option (especially if you’ve had that card for a very long time) is to keep the card open but use it sparingly. Instead, try to pay off loans and car notes that will automatically close once they are paid in full. You also want to be sure you’re not opening too many lines of credit simultaneously. That can also be a red flag for future lenders, categorized as New credit by both FICO® and VantageScore.


Know your credit score

If you don’t know your current credit score, there are many ways to find out for free. 

According to the Federal Trade Commission, federal law gives every American the right to get a free copy of their credit report every 12 months. Through December 2022, everyone in the U.S. can get a free credit report each week from all three national credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com

Additionally, anyone in the U.S. can get six free credit reports annually through 2026 by visiting the Equifax website or calling 1-866-349-5191. That’s in addition to the one free Equifax report (plus your Experian and TransUnion reports) you can get at AnnualCreditReport.com.  If you do not have a U.S. cell phone number or access to email, you can print a form and mail it in.

Many credit card companies will give you access to a free credit reporting tool. Check your card’s terms for details.

As you work toward building better credit, be sure to check out Esusu’s Credit Education hub! We’re teaming up with organizations like Freddie Mac to bring free credit education courses to everyone.