Key Takeaways:
- Your credit score is calculated using certain information in your credit report.
- There are different credit score providers and they may have different versions or models of their credit scores.
- Important credit score factors include if you’re making your payments on time consistently and how much debt you currently have.
- Knowing common credit score factors can help you make better decisions when it comes to your credit health.
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For a quick measure of your credit health, your credit score is the place to look. Lenders may use it as part of their criteria when deciding whether to extend you credit. It’s important to know not just what your score is, but how it’s calculated. Knowing the credit score factors can help you feel confident in the credit-related decisions you make and help you improve your credit health over time.
How is your credit score calculated?
Certain information in your credit reports affects your credit score. Information related to accounts, like your payment history and balances, can impact your credit score, along with recent credit applications or negative items like collections or bankruptcies. It’s important to know that your personal information does not affect your credit score. This includes not just the personal information you see on your credit report, but things like race, gender identity and religion, to name a few. But even though it may have no direct impact on your credit score, don’t ignore the personal information section of your credit report. You can get a free copy of your credit reports each week at annualcreditreport.com.
If you don’t recognize personal information in your credit report, there may have been an inaccuracy in the information you provided to a lender or you could be a victim of identity theft. If you do spot something on your TransUnion credit report you believe to be inaccurate, you can submit a dispute.
What are the credit score factors?
Your credit score is determined by how you’ve managed your credit. There are different scoring models; each model and its accompanying versions may weigh scoring factors differently. One model may place more importance on your outstanding balances than another. Another model might place a greater weight on the age of your accounts. In general, the factors tend to overlap from model to model, but how much emphasis they put on those factors in their algorithms can vary.
Two of the most popular scoring model providers are VantageScore and FICO. Both have different versions of their scoring models. When you get a credit score from TransUnion, it’s a VantageScore® 3.0 credit score. Below is a breakdown of the VantageScore® 3.0 credit score factors.
Payment history – 40%
Lenders want to know you’re good at paying back your loans on time. So, naturally your payment history is an important credit score factor. Consistently making on-time payments for your accounts can help you build and maintain a healthy credit history. Alternatively, missing payments can have a significant, negative impact on your credit score.
Credit usage – 34%
Credit usage is made up of three different factors which include your credit utilization (20%), total balances (11%) and available credit (3%).
Your credit utilization is a percentage of how much credit you’re using compared to your total credit limit. If your total credit limit is $10,000 across your accounts and you have an outstanding balance of $3,000 across your accounts, your utilization ratio is 30%.
Paying off credit card balances in full every month will help you save money on interest charges and keep your utilization rate low. If you’re trying to pay down debt, shooting for under 30% utilization is a good goal, but the lower the better. Much of the focus for credit utilization is on your revolving accounts, like credit cards, but some installment accounts may be included in your utilization as well.
Total balances is a simple measure of the total amount of balances owed on your accounts, both current and delinquent. Like your utilization percentage, high balances could be an indicator you may have trouble making payments in the future.
The available credit factor analyzes whether you have more credit at your disposal than you may need.
Credit depth – 21%
Credit depth is a combination of two different factors: length of credit history and account mix, which make up for a combined 21% of your credit score.
The length of your credit history is measured by the average length from your oldest account to the youngest account. Account mix looks at the number and types of credit accounts you have. A long history of credit with a diverse mix of accounts can help your score. Does that mean you should go out and buy a car just to get a new installment account on your report? Of course not. Financial decisions should be made with your entire financial picture in mind, not just your credit score. As your finances and credit mature and your credit history becomes longer and remains in good standing, your score will benefit. If you close an account, you may see a drop in your score, especially if it was one of your older accounts.
New credit – 5%
When you apply for a new credit account, it may result in a hard inquiry on your credit report. Hard inquiries can signal that you’re looking to take on more debt, but they have a relatively minor impact on your credit score.
The impact of hard inquiries on your credit score tends to lessen over time, and they fall off your credit report after two years.
Pro Tip:
If you’re rate shopping for a mortgage or auto loan, consider applying for loans all within a short window of time. By “bunching” your applications, you can limit the number of inquiries on your credit report. The applicable time period depends on the scoring model used.
What are the two most important factors in calculating your credit score?
Your payment history and credit usage are the two of the most important credit score factors. Making your payments on time and keeping your balances as low as possible, especially across your credit card accounts, are paramount to building and maintaining a healthy credit history and credit score.
Don’t be concerned if the balance you see in your bank app or credit card account is different than what you see in your credit report, especially if you just made a payment. Your credit report will show you the balance most recently reported by your lender. Your lender may just need time to provide the updated information to the credit reporting agencies. As you work to pay down balances, your healthy credit habits should be reflected in your credit score over time.
How does credit scoring work?
You may be wondering how, with a click of a button, you’re able to almost instantly receive your three-digit credit score. It may seem complex with so many different scoring models and three nationwide credit reporting agencies (CRAs): Equifax, Experian and TransUnion.
Here’s an overview of how it works:
When you request your credit score, whether it’s through your bank, lender or other service, a request will be sent to whichever CRAs the service provider uses. The CRAs will run your credit report data through the algorithm of a particular scoring model. For example, your bank may provide a VantageScore® 3.0 credit score based off the information in your TransUnion credit report. Other financial institutions, websites or apps may use a different credit scoring model based on data from a different CRA.
The three nationwide CRAs may not all have the exact same information. As a result, while the information in your credit reports will be similar, it may not match completely from report to report. And, because there are different scoring models, it’s normal to see some variation in the credit scores you’re given — this typically isn’t cause for alarm. However, if your credit scores are significantly different, it’s worth reading through your credit reports to see if you can determine a cause. You’ll want to be on the lookout for any account that doesn’t look familiar, which can be a sign of fraud.
How to improve your credit health
Healthy credit is largely about keeping up with payments, making sure your balances are low and not taking on more credit than you need. Limit credit applications to only when necessary, which can help you avoid negative impacts to your credit score with hard inquiries. You don’t need to avoid credit altogether, but be conscious about what you’re applying for and how often you’re applying.
Consider a credit builder loan or secured credit card
If you’re new to credit, a credit builder loan or secured credit card may help you get your credit started. Credit builder loans usually have more lenient approval conditions for people with limited credit or lower credit scores and can help you build or rebuild your credit history. Unlike a traditional loan, when you take out a credit builder loan, you’re not given money directly from a lender. Instead, the lender will put your monthly payments into a savings account. When you’ve made all the necessary payments, you will then have access to the funds in the savings account. Credit builder loans do have costs though. Typically, any interest or fees charged by your lender are not added to your savings account.
Secured credit cards, like credit builder loans, can also be a useful tool for people looking to build their credit history. With a secured credit card, you make an initial deposit. This deposit becomes your credit limit and you can spend up to that amount on the card at any given time. Your activity on the card will be reported to credit reporting agencies, so good credit behavior will help you build a healthy credit history.
Read your disclosure after applying for credit
If you apply for credit, you’ll receive a disclosure after submitting your application. The disclosure will include your credit score, what credit score model was used and the credit reporting agency or agencies that provided the credit report data, among other information. The disclosure will also include information on why your credit score could be higher. That information comes in the form of reason codes. Sometimes they are referred to as factors.
Sometimes those reason codes come with an explanation. If the score on your disclosure is based on a VantageScore® model, you can plug those codes or explanations into an online tool, Reasoncode.org, to see what the codes mean.
Here are some example reason codes for VantageScore® 3.0:
32: Balances on bankcard or revolving accounts too high compared to credit limits
85: You have too many inquiries on your credit report
12: The date that you opened your oldest account is too recent
The codes on your disclosure will be in order, from most impactful to least impactful. These reason codes can be a useful tool to help you decide what steps to take to improve your credit score. If a person received the reason codes above, smart steps to take would be paying down balances as best they can and taking a break from applying for new credit, if possible.
The important thing to remember is that a changing score is based on changing information in your report. As your credit report data changes, your score may as well. Getting comfortable reading your credit reports and understanding credit score factors will help you feel confident as you make strides to improve your credit score.
Credit Score FAQs
Can I dispute my credit score?
You can’t dispute your credit score. However, you can dispute the information in your credit report, which is used to calculate your score. If you see inaccurate information in your credit report, you can submit a dispute through the TransUnion Service Center. Visit our Dispute page to learn more.
How long does it take to get a good credit score?
Healthy credit doesn’t happen overnight. Paying down balances can help you make quick progress to an improved credit score. But a good credit score is the result of consistently practicing good credit habits.
Will checking my credit report or score lower my score?
No, checking your credit score will not impact your credit score. Checking your own credit report is considered a soft inquiry, and those don’t affect your score.
Will paying off my debt raise my credit score?
Paying off a loan completely may result in a drop in your credit score. This can seem contradictory, because it is a good credit habit. Credit scoring models tend to favor longstanding, active accounts in credit score calculations. If you pay off a loan or close a credit card account, it may lower the average age of your accounts and drop your credit score. Though the financial benefits of paying off a loan can outweigh the effects of a drop in your credit score.
How often does my score update?
Your credit score may change any time the information in your credit report is updated. Read our blog for more information about why your credit score may change.
