What are Credit Score Factors? How They Highlight Your Financial History and Determine Borrowing Risk

Your credit score has a huge impact on your financial life. It is like a report card that tells lenders how well you manage loans and credit cards. If that’s the case, that means the factors that go into your credit score are like the subjects you earn grades in. 

Credit score factors are the elements that scoring models such as FICO and VantageScore use to generate your credit scores. Each factor is a snapshot of your credit management in one area, and together they help lenders determine risk.

Understanding what goes into your credit score is the first step in changing it for the better. So, sit down and get your pencils out as I cover your credit score’s essential elements, discuss the differences between FICO and VantageScore, and offer some tips on how to manage a healthy credit profile. Don’t worry, I promise there won’t be a test at the end.

Your credit score affects everything in your financial life, from getting approved for a loan to enjoying the best credit cards. I will help you understand how credit scores work and their influencing factors so you can efficiently manage your financial well-being.

Your credit score is a numerical representation of your creditworthiness based on the information in your credit reports. It predicts for lenders and credit card issuers the likelihood that you’ll default on your debt obligations sometime in the next two years. I’ve seen the turmoil that default generates, and believe me, you don’t want to go there.

The most commonly known types of credit scoring models available for general use are FICO and VantageScore. Although they both share a scoring range of 300 to 850, they have somewhat different scoring methodologies that you’ll want to understand so that you can reconcile your behavior to the scores you earn.

The three major credit bureaus — Equifax, Experian, and TransUnion — calculate credit scores using models developed by FICO and VantageScore. These bureaus refresh your scores based on new information from your credit reports. They get data from various sources: creditors like banks and credit card companies, public records such as bankruptcies, and collection agencies. 

Creditors report credit account activity to the bureaus, detailing payment history, credit utilization, and other factors. Public records and collection agencies furnish information concerning legal and collection actions. All this data is captured in your credit reports, from which the bureaus compute your credit scores.

FICO vs. VantageScore

FICO and VantageScore estimate the credit risk you pose to a lender. Still, they do so in slightly different ways. With a more extensive history and broader audience, FICO focuses on five primary factors: payment history, amounts owed, length of credit history, credit mix, and new credit inquiries. 

The contributions of each factor to your overall score are weighted according to their importance:

Devised in 2006 by the three big credit bureaus, VantageScore evaluates similar credit factors but puts them in a slightly different order of importance. It more heavily weights overall credit utilization, balances, and recent credit behavior. More significantly, VantageScore typically produces scores even when consumers have short credit histories. This can really help if you are just starting to use credit. 

Both systems are designed to provide the most complete picture of creditworthiness possible. Still, because of these differences in weight, the scores can vary. In addition, the latest version of VantageScore has some features that differ from FICO’s: 

• VS considers how you have handled your debt over time, such as whether you’re paying down or making minimum payments.
• It doesn’t count unpaid medical debts in certain cases.
• VS groups credit checks together if they are applied for within 14 to 45 days of each other — depending on the type of financing. These have less effect on your score. The latest FICO version also groups checks, but only for car, home, and student loans applied for within 30 days. 

Your FICO and VS scores will not be identical, but should be close in value.

Scoring Ranges 

FICO and VantageScore use scoring ranges to categorize creditworthiness, but their interpretations vary slightly. FICO scores range from 300 to 850. A score between 670 and 739 is considered good, 740 to 799 is very good, and 800 and above is exceptional. Scores below 670 indicate fair or poor credit, signaling higher risk to lenders. Poor credit can hamper your ability to secure loans and jack up the interest rates you are offered.

VantageScore also uses a 300 to 850 range but has different classifications. A score of 661 to 780 is considered good, while a score above 780 is excellent. Scores between 601 and 660 are fair; those below 600 are poor or very poor. These classifications help lenders quickly assess your credit risk and determine your loan eligibility and terms.

Here is a closer look at FICO and VantageScore credit score ranges:

From my experience, understanding these scoring ranges is crucial for managing your credit health. Higher scores generally lead to better loan terms, lower interest rates, and more credit opportunities. Conversely, lower scores can result in higher interest rates and limited borrowing options.

I advise regularly monitoring your credit scores and knowing where you stand. This will help you make informed financial decisions and take steps to improve your credit profile.

I’ll concentrate on FICO’s five-factor system because it is the dominant credit scoring model. 

VantageScore uses the same information but weighs things differently when calculating a score.

Payment History 

Payment history comprises the most significant part of your credit score, the most critical factor in the FICO model. Timely payments can boost your score over time. Lenders want reassurance that you are making payments consistently and predictably. Paying on time suggests that you are a creditworthy individual.

On the other hand, late payments can hurt your credit score. Just one payment that is overdue by 30 days or more can drop your score, and the longer it goes unpaid, the worse the impact. Avoid late payments if you want a good credit score.

The penalties for allowing an account to go into default are much worse. A default occurs when a creditor charges off your account because you stopped paying for several months. This can do absolutely devastating damage to your credit score. That information remains on your credit report for seven years and can make obtaining new credit cards or loans quite challenging.

I strongly advise you to prioritize making at least the minimum payments due each month. Automatic payments can help you avoid late fees and defaults — a great way to protect your valuable credit score.

Amounts Owed

The second principal constituent of your FICO score is how much money you owe. FICO looks closely at your credit utilization ratio (CUR)—the proportion of your current credit card balances compared to your credit limits. You want this ratio at low levels (below 30% and ideally closer to 1%) to positively affect your credit score. Note that VantageScore treats debt level and CUR as two separate factors.

A high CUR can bring down credit scores, as it may indicate that you are experiencing financial distress. In addition, default is much more likely with high credit utilization, and creditors may be unwilling to extend any further credit to you.

Your credit utilization ratio should improve if you maintain your credit card unpaid balances within healthy limits. I advise paying your monthly balance to keep a low CUR and avoid interest charges. If you find that too challenging, I suggest you ask for a credit limit increase, automatically lowering your CUR (as long as you don’t go on a spending spree!).

You can reduce your CUR by paying most or all of your monthly balance, spreading your expenses across multiple cards, and avoiding closed accounts (which I discuss below). These techniques can help to keep your credit usage low and your credit score high.

A balance transfer credit card can help you reduce your credit utilization. It allows you to transfer high-rate debt from your existing credit cards to a new card with a low or 0% APR for a set introductory period. You can then concentrate on repaying the one remaining balance.

For this to work, I suggest you stick your other credit cards in your sock drawer until you pay off the balance. You want to avoid new debt, so use cash or a debit card instead.

An alternative consolidation method is to use a personal loan to pay off all your credit card balances. You repay the loan in fixed monthly installments and set the loan term to make the monthly payments affordable. Personal loans cost more than interest-free introductory promotions. Still, they can allow you much more time to repay your balance.

Consolidating debt onto one card usually gives you a higher credit limit with a lower balance, reducing your credit utilization ratio. This makes it easier to manage payments and improves credit scores: a lower utilization ratio represents better management in the eyes of creditors.

Length of Credit History

FICO considers that, by and large, the older your credit accounts are, the better. Credit scoring models look at the average age of your accounts. In a sense, it typifies your credit stability and trustworthiness. The models also register the ages of all your accounts, including the oldest and youngest.

Your average credit account age is the sum of all your credit account ages divided by the number of accounts. Older accounts improve this average and benefit your credit score.

Opening new credit accounts can impact your score for a few reasons. One is that it reduces the average age of your credit history. On the other hand, your credit utilization ratio should drop because you’ll have more available credit, which will help your score. I discuss the third effect —hard credit inquiries — below.

Keeping older accounts open will likely increase your credit score, bolstering your average credit account age. Just hanging onto an ancient credit card works best if you use it at least once a year. Otherwise, the credit bureaus may consider it defunct.

Credit Mix

A broad mix of credit account types may slightly boost your score. Scoring companies tend to see a mix of different credit types, including credit cards, mortgages, vehicle loans, and student loans, as showing you have the skills to manage more than one sort of credit.

A mix of revolving credit accounts, credit cards, store cards, and installment loans will increase your credit mix. 

You should have a strategy for managing different types of credit accounts, keeping track of the conditions and terms defined for each account. In all cases, timely payments are necessary to keep your credit profile healthy.

Even with the slight score boost you can earn from widening your credit mix, I strongly advise against opening credit accounts you don’t need. All too often, I’ve seen consumers fall into a debt trap by using credit they couldn’t afford. In other words, the downside of overextended credit overwhelms the upside.

New Credit Inquiries

Applying for new credit may put downward pressure on your credit scores. Most credit card and loan applications cause the creditor to pull a hard inquiry on one or more of your credit reports, a negative for your scores.

“Hard” means that the credit bureaus record the inquiry and count it against you. Hard inquiries remain on your credit reports for two years but only affect credit scores for the first year. 

Only you can authorize a creditor to perform a hard credit pull. Most credit card issuers and lenders require this authorization to accept your application; read the fine print to verify.

The effect of hard inquiries on your credit score is minimal. Still, if many of them are made too close together timewise, they will combine to strengthen the impact considerably. Keep this in mind: spacing out your applications for new credit so you do not cause unnecessary and unwarranted dips in your score. I recommend waiting six months between applications for new credit.

Soft inquiries, on the other hand, do not have any effect on your credit score. They usually occur when:

• You check your own credit reports
• Creditors prequalify your request for a credit card or loan
• A non-creditor (i.e., employer, landlord, utility, dating service, police, etc.) pulls your reports

I recommend you seek prequalification whenever it’s available. It will let you know whether an application has a chance to be approved — if not, you’ll save the hit caused by a hard credit inquiry.

In any case, do your best to apply for new credit only when necessary and research the likelihood of approval before applying for a new credit card or loan. This allows you to build and maintain your credit score as you attempt to increase your available credit. 

Tracking the factors that affect your credit score helps you protect your credit profile and gain better financial opportunities. Checking your credit reports regularly for errors or frauds, challenging misinformation, and developing good practices in using credit are essential habits that will help you manage your finances.

Check Your Credit Regularly 

You should check your credit reports regularly for accuracy and to know where you stand. You can review your reports to identify inconsistencies or other problems that may harm your credit score, including identity theft. 

I advise you to make it a habit to review your credit reports at least annually. This will keep you updated on your credit health and prepare you to take immediate action if something is amiss. It is vital to detect possible identity theft or fraud, as the damage these can cause can be severe.

Disputing Errors

If you find mistakes in your credit reports, dispute them immediately. You’ll need to identify the error and prove it is incorrect. This proof may include receipts from payments, account statements, tax returns, and correspondence between you and your creditors.

You can file a dispute with the credit bureau that reported the error. You can often do this online, via the mail, or over the phone. Clearly state the mistake and include a copy of supporting documentation. The credit bureau will have 30 days to investigate your dispute, typically contacting their information furnisher to verify.

Once an investigation is complete, the credit bureau will notify you of the results. Suppose it confirms that there was an error. In that case, it will correct your credit report and provide you (and recent recipients) with an updated copy. In case the dispute does not end up in your favor, you may request to have a statement included in the credit file. Keep records of all communications and follow up if the dispute drags out too long.

You can contact a credit repair bureau If you want help disputing errors on your reports. Due to their expense, I suggest you only do so if you encounter multiple inaccuracies or are unwilling or unable to do the work yourself.

Building Good Credit Habits 

Developing good credit habits can help you build or rebuild your credit rating. The most important habit is paying your bills on time. Your payment history makes up a significant fraction of your credit score. Setting up an automated payment or reminder system through a financial institution can help ensure you never miss a due date. 

Another good habit to adopt is keeping your credit utilization ratio low. Ensure you are not using more than 30% of the available credit limit at any time. Pay off existing balances and avoid new unnecessary debt to ensure that you stay within a healthy CUR range. 

Here is an example CUR calculation for someone with three credit cards:

You can achieve a better utilization ratio by requesting (and getting) credit limit increases on existing cards. Diversifying your credit mix — having a mix of credit types, from credit cards and auto loans to a mortgage — is also good. Responsibly handling different kinds of credit shows an ability to manage a diversified portfolio of financial obligations. 

You can progress steadily toward good credit habits and better financial health through patience and consistency.

Understanding the factors that affect your credit score is essential for building and maintaining a positive credit history. I advise concentrating on the three key drivers of credit score — payment history, credit utilization, and the length of your credit history. Doing so will position you for a higher score. Moreover, by regularly monitoring your credit reports, disputing errors, and creating good credit habits, you’ll help ensure a healthy credit profile.

I’ve seen many people rebuild their credit after unfortunate circumstances. They did so by being disciplined and following best practices. Whether you are starting from scratch or trying to achieve an excellent score, consistency and patience are the two most important virtues. They are the keys to a secure and financially healthy future.