By Allan Halcrow | American Express Credit Intel Freelance Contributor
8 Min Read | July 31, 2020 in Credit Score
Ultimately, you have control over the elements that affect your credit score.
What usually affects your credit score most are payment history and credit utilization – how much you use of your available credit.
Credit score simulators now allow you to forecast the potential impact of your actions before you take them.
Which of the following most influences your credit score: banks and credit card companies, credit reporting bureaus, or you? Ultimately, it’s your own behavior. Each time you take out a loan or use your credit card and each time you make a payment (or don’t), that action is likely to influence your score. After all, your credit score is nothing more than a report card on how you manage your financial obligations. To learn more about credit scores, read “What Is a Credit Score?"
Naturally, therefore, it can help you to know how much different actions could affect your credit score. Fortunately, it’s not as mysterious as it may seem. First, the leading credit score providers – Fair Isaac Corporation (FICO) and VantageScore Solutions – both share general guidelines about how their scores are calculated. And second, technology now lets you see those guidelines in action. You can access several online credit score simulators that estimate the impact of specific actions.
In researching this article, I used two online credit score simulators, at Credit Karma and at MyCredit Guide from American Express. Both tools use the VantageScore Solutions scoring model and data from your TransUnion credit report, though their features and data presentation vary. What I saw on both tools was eye-opening.
Based on FICO and VantageScore guidance, plus my own experience with the credit score simulators, these are the actions likely to affect your credit score, listed from most to least impact:
Let’s dive deeper into what the credit score simulators showed about how each of these affected my credit score.
Experts agree that paying your bills on time has the greatest effect on your credit score. FICO says payment history accounts for 35% of your FICO score.1 VantageScore, which does not disclose percentages, describes payment history as “moderately influential” in its scoring system,2 suggesting that its scoring model weights payment history less than FICO’s. To learn more about the differences in scoring, read “What Is a Credit Score?”
Experts suggest that paying anything less than the required minimum payment on time will work against you.3 If you do have to pay late, it likely won’t affect your credit score until it’s more than 30 days past the due date. Experts say that one late payment probably won’t hurt you much, but being late on several accounts, or late on one account multiple times, probably will.4 My experience with the MyCredit Guide credit score simulator demonstrated this. One late payment had no effect, but making late payments to all my creditors dropped my score a whopping 19%.
Experts also caution that the later your payment gets the greater the negative impact. Payments that are 60 or 90 days late will likely hurt your score more than those that are 30 days late.5 Again, the MyCredit Guide simulator proved the point. Letting all my accounts fall 90 days behind cost me almost a quarter of my score and dropped me two ranges. For more on how lenders interpret the scoring ranges, read “Credit Score Ranges: What is an Excellent, Good, or Poor Credit Score?”
Experts say that serious payment issues – such as charge-offs, collections, foreclosures, tax liens, or bankruptcy – can ruin your credit score.6 These may remain visible on your credit report for as long as a decade. A big factor in their impact is that items that don’t typically show up on credit reports may do so when they are assigned to a third-party debt collector. Those items may include everything from unpaid parking tickets or child support payments to utility and cell phone bills.7 In the MyCredit Guide simulator, a single account going to collection decreased my score by 6%.
The next greatest effect on your FICO credit score is the amount of credit you use as a portion of how much is available to you, known as your credit utilization rate. FICO says it counts for 30% of your FICO score. VantageScore calls it “extremely influential,” and gives it the greatest weight of all factors in its scoring model. Experts say that when your utilization exceeds 30% it hurts your score.8 I saw that in the Credit Karma credit score simulator: Maxing out a single card that had been at 12% utilization dropped my score by almost 2%.
FICO says that credit history counts for 15% of your FICO score, and VantageScore describes it as “less influential.” Two things influence this portion of your score: The age of your oldest account and the average age of your combined accounts.9 Lenders value history, so experts caution that opening new accounts can work against you because it lowers the average age of your accounts.10
Experts also caution against looking at these elements in isolation. For example, opening a new credit card account may have an initial negative impact on the credit history portion of your score. But experts say this may be offset by an improvement in the utilization rate component of your score, because the total amount of credit available to you increases when you open the new account.11
Lenders want to see that you can effectively manage different kinds of debt, which is why FICO says your credit mix accounts for 10% of your score and VantageScore labels it “highly influential.” Experts say that having a portfolio that includes only credit cards or only installment loans (such as an auto loan or mortgage) has a negative impact.12
Each time a lender “pulls” your credit report for the purpose of making a lending decision, it’s known as a hard inquiry. Pulling a report to review it yourself, or if a lender pulls it to pre-approve you for an offer, is considered a soft inquiry. Each hard inquiry results in a ding on your credit (it cost me about 0.25% on the Credit Karma simulator) and stays on your report for as long as two years. So, given the way it might reduce your credit score, experts advise against applying for credit too often in a short period of time.13 There is a notable exception to this rule. Experts note that scoring models allow for the reality that consumers want to shop for the best option when seeking a major loan. Therefore, multiple inquiries for auto loans, student loans or mortgages made within a 14–45 day window, depending on the loan and scoring model, may count as a single inquiry.14
Although many factors contribute to your credit score, all of them ultimately are within your control. By focusing on the areas that most affect your score and avoiding actions that could hurt your score, you can set yourself up to earn a high credit rating that qualifies for better lending options.
1 “FICO Scores—A Vital Part of Your Credit Health,” Fair Isaac Corp.
2 “What Influences Your Score,” VantageScore Solutions
3 “When You Can't Make Your Minimum Credit Card Payment,” The Balance
4 “You May Be Surprised at What Affects Your Credit Score,” Credit.com
5 “What Factors Affect Your Credit Scores?,” Credit Karma
6 “5 Factors That Affect Your Credit Score,” The Balance
7 “You May Be Surprised at What Affects Your Credit Score,” Credit.com
10 “What Factors Affect Your Credit Scores?,” Credit Karma
12 “You May Be Surprised at What Affects Your Credit Score,” Credit.com
13 “What Affects Your Credit Scores,” Experian
14 “What Factors Affect Your Credit Scores?,” Credit Karma