6 Key Credit Score Factors That Impact Your Creditworthiness

credit score factors

When lenders are considering your creditworthiness (aka if they should lend to you), they consider many factors. However if you’re looking to improve your credit score, it’s important to understand the 6 biggest factors that impact your score.

On-Time Payments

High Impact on Credit Score

Are you reliable? What’s your track-record for paying what you owe on-time? This is a big one.

Think about it; if you lend your brother-in-law $500 for the week and he promises to pay you back next week – but he doesn’t, and you need to follow-up for a month until you get your $500 back – you’re going to think twice about handing him some cash next time he’s in a pickle. If he’s late once you may loan him some cash again. But if it happens twice then you’re most likely going to make some excuse about how you don’t have the cash to lend him for the third request.

The same thought process, relatively speaking, is true of creditors in the financial world. The better your track-record of paying on-time, never late, and even early, builds confidence that you are a trustworthy borrower who will be reliable in the future if they were to lend you money.

A payment that is 30-days late, or more, is typically reported to the credit bureaus and will reflect negatively on your credit score. This has a very high impact on your credit score.

Age of Your Credit Accounts

High Impact on Credit Score

How old is your oldest credit account? If it’s more than 25-years old you’re as good as it gets. 8–25 years is great, and 2–7 years is considered average. Anything under 2-years old and it’s considered a newer account and may be seen as a potential liability as it’s track-record is so short.

It is important to never close credit accounts if you don’t have to. Have an old credit card from college that doesn’t offer many perks or a high enough limit? Don’t close it. Instead let it sit and continue to age as that will bolster your overall credit score. Note that some creditors will close down old accounts with no activity. To avoid this, just be sure to use that card once every 3–6 months for a tank of gas or lunch (then pay it off right away) to keep the account open and active.

Percent of Available Credit Used

High Impact on Credit Score

How much credit you’re using matters. Do you have one credit card with a $10,000 limit, but have kept a balance of $5,000 on it? That means you’re using 50% of your available credit, which is a strong negative indicator of your creditworthiness. In an ideal world you should always pay off your revolving credit accounts each month to keep your used credit ratio low, but more importantly to avoid debt trouble and getting behind on payments.

TIP: If you request a line of credit increase every 6-months, most creditors will extend some sort of increase if you have a good credit history with them. This typically does not appear as a “hard-pull” of your credit, as the creditor does an internal “soft-pull” to your report. By systematically increasing your credit limit, you increase your available credit ceiling, thus lowering your available credit used percentage. Once you successfully receive a credit line increase, simply set a reminder on your smart-phone or web-calendar to request a new increase 6-months out.

Recent Inquiries

Low Impact on Credit Score

When lenders see several inquires on your report it may be seen as a sign of risk. What’s the financial change that warranted all of these sudden inquiries? Is there an external variable that will be causing this customer to need to borrow more? Additionally, if there are several hard pulls but no accounts opened it can be seen as a red flag as it may be perceived that other lenders looked into the customer’s credit history, but did not approve them for the loan or line of credit. If one lender didn’t approve you, why should another?

You’re typically in bad shape if you’ve had more than 5 hard inquires in the past 2 years, but only 1-2 and you’re in good shape!

New Accounts

Low Impact on Credit Score

Have you opened several new credit accounts in recent years? That can cause an issue from a lender’s perspective. Try to limit the number of credit accounts you have and space out your new accounts if possible.

If you have $10,000 in available credit but try to open 4 new accounts at $2,500 limits each for another $10,000 in buying power, it’s going to raise some major red flags. Is the customer facing financial trouble, are they going to over-extend on this credit and become insolvent? Or perhaps there is some large purchase they’re trying to make but clearly can’t afford at their current income and credit level?

Remember to slow-roll your new accounts. Slow and steady without major jumps or changes is the recipe for maintaining a higher credit score here.

Available Credit

Low Impact on Credit Score

As a general rule if you have more than $50,000 in total available credit this shows lenders that you’re managing your credit responsibly, and other creditors are entrusting higher limits to you. If you have less than $2,500 in available credit, however, this is below average and you should work to increase this limit as soon as possible. In general, the more available credit you have at your disposal, the better it is for your credit score. Just remember to remain responsible with your heard-earned dollars, and that increased credit lines do not mean your budget can necessarily afford increased expenses.