How Credit Score Works
Credit score plays a major role in how you live your life financially, it can help you get out of bad circumstances or it can put you in bad circumstances if not taken care of. It is understandable things happen and it might your credit score, this post outlines different factors that affect credit score, so you can use those factors to make or maintain your credit score at its best.
Credit Score Ranges:
Credit score ranges from 350 – 850. 350 being the poor credit score and 850 being the best credit score. Credit scores are calculated using different methods, but the most popular ones are VantageScore 3.0 which is provided many free providers like CreditKarma and there is the FICO method. Below are the common ranges in both models.
300-500: Considered very poor credit score, with this score you are at very high risk, and no lenders, will be willing to lend you money.
500-600: Considered poor credit score, with this credit score none or very few lenders are willing to lend you a loan, credit card, or mortgage.
601-660: Considered fair credit score, with this credit score you will have fewer options to get a loan, credit card, or a mortgage. And the interest rates will be astronomically high as they consider a person with a credit score 630-689 poses more risk to delinquent.
661-780: Considered good credit score, with this credit score you will have more lenders willing to lend money, credit score, or even a mortgage. You will get considerably low-interest rates.
780-850: Considered excellent credit score, with this credit score you will have more options to choose from, and you will get best rates possible when shopping for mortgage or a car loan or even good rewards credit card.
Factors That Effect Credit Score:
There are six major factors that will directly effect your credit score.
Payment History: This factor has a very high impact and the most impact on your credit score, if you miss a single payment that will drag your score at least 60-70 points, and it will be there on the record for a long time. A 100% on-time payment is a good sign for lenders that you can reliably make payments. If full payment is not possible at least pay the minimum payment on time, and if you still can’t pay the minimum payment you ask your lender to push the payment date by a couple of days which will give you some room but make sure you pay on time to have a healthy credit score.
Credit Card Utilization: This is the second most important factor and this also has a high impact on your credit score. It is always good not to use more than 30% of your credit limit. Let’s say you have a $10,000 credit limit combined on different credit cards make sure you use less than $3000 combined per month. Anything above 30% usage will affect your credit score badly, If you have more monthly expenses ask your credit company to increase the limit so you will some room in 30% to spend.
TIP: You can ask your credit card company to increase credit every 6 months.
Derogatory Marks: This is the third most important factor and also has a high impact on credit scores. Any collection records or public records come under derogatory marks, so make you don’t foreclose or delinquent your credit cards. Any kind of bankruptcy will come under these derogatory marks and will be on your record for at least 7 years.
Age Of Credit History: This has a medium impact on your credit score, there is very little you can do to keep this high. Age of credit history is basically the average of your oldest card/ loan and your latest card/loan. keeping fewer accounts and keeping them in good standing will help you have a high score here.
Total Accounts: This has a low impact, the more accounts you have the more good it does to your credit score, accounts include everything from credit cards, personal loans, student loans car loans, and mortgages, etc… This doesn’t mean you have to open an account even though not needed, be cautious and open an account as deemed necessary.
Hard Inquiries: This has a very low impact, the fewer hard inquires you have in the past two years the better. A hard inquiry is something that will happen when you open a credit card or a loan, the lender will request your credit report from different credit reporting agencies which will be a hard hit on your credit score. So here the fewer credit checks in the past year the best.
So these are the key factors that will affect your credit score, knowing more about these factors and using those to your benefit can increase your credit score and opens the door for more opportunities.
Frequently Asked Questions
What factors determine my credit score?
Payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%) are the main FICO factors. Paying on time and keeping balances low dominate the math. Closing old accounts hurts length of history.
How fast can I improve my credit score?
Lowering utilization can produce gains in one billing cycle. Removing collection items or correcting errors can move scores immediately. Building from poor to good usually takes 6–18 months of consistent on-time payments.
Does checking my credit score lower it?
No — checking your own score is a 'soft inquiry' with no impact. Only 'hard inquiries' from new credit applications affect scores, and only by a few points temporarily. Free monitoring through Credit Karma or Experian is fine.
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