The Two Biggest Factors That Can Make or Break Your Credit Score: Payment History and Credit Utilization

A credit score is a three-digit figure that lenders use to assess a borrower’s risk before making a loan.

Before determining how much and at what interest rate to lend you, credit card companies, car dealers, and mortgage bankers are some of the lenders that will check your credit score. Your credit score may also be considered by landlords and insurance companies when evaluating your financial stability prior to renting an apartment or granting an insurance policy.

The following list of the top five influencing factors, their effects on your credit, and the significance of your credit score for loan applications

Your credit score is an important figure that has numerous potential effects on your financial situation. A good credit score can open doors that would otherwise stay closed, from getting approved for credit cards to securing loans and mortgages to even landing your dream job. However, what precisely goes into determining your credit score, and what are the key elements that determine how high or low it is?

In this comprehensive guide, we’ll delve into the two biggest factors that influence your credit score: payment history and credit utilization We’ll explore how these factors are calculated, their impact on your overall score, and actionable tips on how to improve them for a healthier financial future.

Payment History: The Cornerstone of Creditworthiness

Payment history, accounting for a whopping 35% of your FICO® Score, reigns supreme as the most critical factor in determining your creditworthiness. It reflects how consistently and responsibly you’ve paid your bills on time, including credit cards, loans, mortgages, and even utility bills.

Think of it this way: lenders want to see a track record of reliability. By consistently making your payments on time you demonstrate your ability to manage debt responsibly making you a more attractive borrower in their eyes. Conversely, late payments or missed payments can significantly damage your credit score, raising red flags for lenders and potentially hindering your access to credit.

Credit Utilization: Striking a Balance Between Usage and Responsibility

Credit utilization, the second most influential factor, accounts for 30% of your FICO® Score. It measures the amount of credit you’re using compared to your available credit limit. In simpler terms, it’s the percentage of your credit card limit that you’re currently utilizing.

Maintaining a low credit utilization rate is crucial for a healthy credit score. Ideally, aim to keep your credit card balances below 30% of your credit limit. For instance, if you have a credit card with a $10,000 limit, try to keep your balance below $3,000. Exceeding this threshold can negatively impact your credit score, signaling to lenders that you’re overextended and potentially at risk of defaulting on your debts.

The Dynamic Duo: Working Together for a Stellar Credit Score

Even though they are two different things, credit utilization and payment history combine to provide a complete picture of your financial responsibility. You are a strong candidate for advantageous loan terms and interest rates if you have a history of on-time payments and a low credit utilization rate, which show that you can manage credit wisely.

Actionable Tips to Boost Your Payment History and Credit Utilization

Now that you are aware of how important credit utilization and payment history are, let’s look at some doable strategies to raise your credit score by strengthening these variables:

Payment History:

Pay your bills on time, every time: Set up automatic payments or calendar reminders to ensure you never miss a due date.
Address any missed or late payments: Contact your creditors and explore options for resolving past delinquencies.
Dispute any errors on your credit report: Incorrect information can negatively impact your score.

Credit Utilization:

Keep your credit card balances low: Aim for a utilization rate below 30%.
Pay down your credit card debt: Prioritize paying off high-interest balances first.
Request credit limit increases: This can help lower your utilization rate without increasing your spending.

By prioritizing your payment history and managing your credit utilization effectively, you’ll be well on your way to building a stellar credit score. Remember, a good credit score is an invaluable asset that can unlock a world of financial opportunities, paving the way for a brighter financial future.

Types of Credit in Use: 10%

The last factor the FICO formula takes into account when calculating your credit score is whether you have a variety of credit accounts, including store accounts, mortgages, installment loans, credit cards, and others. It also looks at how many total accounts you have.

Don’t worry if you don’t have accounts in every category because this makes up a small portion of your score, and avoid opening new accounts merely to diversify your credit mix.

What Counts Toward Your Score

Your credit score shows whether or not you have a history of financial stability and responsible credit management. The score can range from 300 to 850. Based on the information in your credit file, major credit agencies compile this score. Other credit scores exist, such as the VantageScore, but the FICO Score—more especially, the FICO Score 8—is the most widely used credit score.

Here are the elements that make up your FICO Score 8 and how much weight each aspect carries.

what are the two biggest factors in your credit score

How to Increase Your Credit Score (2 Biggest Factors)

FAQ

What are the two biggest influences on your credit score?

The Bottom Line Your credit score is important in getting approved for loans and getting the best interest rates. Different scores take different factors into account, but the most commonly used score, the FICO Score 8, places heavier weight on credit utilization and payment history.

What are the two largest parts of your credit score?

FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

What are the two most important contributors to a credit score?

The most important factor of your FICO^® Score^☉ , used by 90% of top lenders, is your payment history, or how you’ve managed your credit accounts. Close behind is the amounts owed—and more specifically how much of your available credit you’re using—on your credit accounts.

What is the most important factor of your credit score?

What’s the Most Important Factor of Your Credit Score? Payment history is the most important factor of your credit score, making up 35% of FICO® Scores. At Experian, one of our priorities is consumer credit and finance education.

What factors go into calculating my credit score?

Your credit score may seem like it’s the result of a mystical mathematical formula, but the factors that go into calculating your credit score are pretty straightforward. The most important factor of your FICO ® Score ☉ , used by 90% of top lenders, is your payment history, or how you’ve managed your credit accounts.

What factors affect your credit score?

Length of credit history (15%): Generally, a longer credit history can result in a higher score. Mix of credit types (10%): Managing different types of credit, such as credit cards, mortgage loans and personal loans, can help your score.

What factors affect my FICO ® score?

While payment history ranks as the top factor in calculating your FICO ® Score, it’s important to be aware of the four other factors: Amounts owed (30%): The amount of available revolving credit you’re using (also known as your credit utilization ratio) and how much debt you’re carrying accounts for 30% of your score.