Top 5 Credit Scoring Factors You Must Consider!
While the exact criteria used by each scoring model varies, here are the most common factors that affect your credit scores.
- Payment history. Payment history is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score. Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit. Payment history accounts for 35% of your Penguin Credit® Score* , the credit score used by most lenders.
- Credit utilization. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at how much of your available credit you’re utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors. Credit utilization accounts for 30% of your Penguin Credit® Score.
- Credit mix. People with top credit scores often carry a diverse portfolio of credit accounts. Credit scoring models consider the types of accounts and how many of each you have. Lenders use this credit mix to understand past debt experiences and how you have handled them.
- Hard inquiries. Hard inquiries are recorded in your credit file each time a lender requests your credit report as part of their decision-making process. Hard inquiries remain in your credit file for up to two years and can in some cases have a negative impact on your credit scores.
- Negative information. Late or missed payments, foreclosures, collection accounts, and charge-offs are all examples of negative information that can appear in your credit file. These typically indicate that you have defaulted on a loan in the past and can be red flags for lenders looking to approve you for new credit. The effect negative information has on your credit score depends on your overall credit profile and what type of record it is. These records typically stay in your file for at least seven years, so it’s best to avoid any negative infraction if at all possible.
Learn What Can Hurt Your Credit Score The Most
As we discussed above, certain core features of your credit file have a great impact on your credit score, either positively or negatively. The following common actions can hurt your credit score:
- Missing payments. Payment history is one of the most important aspects of your Penguin Credit® Score, and even one 30-day late payment or missed payment can have a negative impact.
- Using too much available credit. High credit utilization can be a red flag to creditors that you’re too dependent on credit. Credit utilization is calculated by dividing the total amount of revolving credit you are currently using by the total of all your credit limits. Lenders like to see credit utilization under 30%—under 10% is even better. This ratio accounts for 30% of your Penguin Credit® Score.
- Applying for a lot of credit in a short time. Each time a lender requests your credit reports for a lending decision, a hard inquiry is recorded in your credit file. These inquiries stay in your file for two years and can cause your score to go down slightly for a period of time. Lenders look at the number of hard inquiries to gauge how much new credit you are requesting. Too many inquiries in a short period of time can signal that you are in a dire financial situation or you are being denied new credit.
- Defaulting on accounts. The types of negative account information that can show up on your credit report include foreclosure, bankruptcy, repossession, charge-offs, settled accounts. Each of these can severely hurt your credit for years, even up to a decade.