What Factors Affect A Credit Score?

From opening new accounts to making a late payment, there are a lot of things that can affect your credit scores. Learn which factors are generally most important, and which may only have a minor impact on your scores.

If you have a goal to reach a particular score or just want to learn more about credit scores in general, it’s important to know what affects your credit scores and how your actions could improve or hurt your creditworthiness.

Although there are many credit scoring models, all the scores are trying to figure out the same thing — the likelihood of you paying your bill on time, or even at all. And whether you’re looking at a FICO® or VantageScore® credit score, your scores are based on the same information: the data in your credit reports.

While various credit scoring models may weigh each factor differently, the leading ones, FICO® and VantageScore®, place similar relative importance on the following five categories of information. We’ve ranked them by which ones are often most important to the average consumer.

1. Most important: Payment history

Your payment history is one of the most important credit scoring factors.

Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them. The effects of missing payments can also increase the longer a bill goes unpaid. So a 30-day late payment might have a lesser effect than a 60- or 90-day late payment.

How much a late payment affects your credit can also vary depending on how much you owe. Don’t worry though, if you start making on-time payments and actively reduce the amount owed, then the impact on your scores can diminish over time.

If you’re having trouble making payments at all, you could also wind up with a public record, such as a foreclosure or tax lien, that ends up on your credit reports and can hurt your scores. Sometimes a single derogatory mark on your credit, such as a bankruptcy, could have a major impact.

2. Very important: Credit usage

Credit usage is also an important factor, and it’s one of the few that you may be able to quickly change to improve(or hurt) your credit health.

The amount you owe on installment loans — such as a personal loan, mortgage, auto loan or student loan — is part of the equation. However, even more important is your current credit utilization rate.

Your utilization rate is the ratio between the total balance you owe and your total credit limit on all your revolving accounts (credit cards and lines of credit). A lower utilization rate is better for your credit scores. Maxing out your credit cards or leaving part of your balance unpaid can hurt your scores by increasing your utilization rate.

Sarah Davies, senior vice president of analytics, research and product management at VantageScore®, says that for VantageScore® credit scores, your overall utilization rate is more important than the utilization rate on an individual account.

However, utilization rates on individual accounts can also affect your credit scores. This means you should pay attention to not just your overall credit utilization, but also the utilization on individual credit cards. Having a lot of accounts with balances might indicate that you’re a riskier bet for a lender.

Keep in mind that you can pay your bill in full each month and still appear to have a high utilization rate. The calculation uses the balance that your credit card issuers report to the bureaus, often around the time it sends you your monthly statement. You may have to make early payments throughout your billing cycle if you want to use a lot of credit and maintain a low utilization rate.

3.  Length of credit history

A variety of factors related to the length of your credit history can affect your credit, including the following:

• The age of your oldest account

• The age of your newest account

• The average age of your accounts

• Whether you’ve used an account recently

Opening new accounts could lower your average age of accounts, which may hurt your scores. However, the hit to your scores could also be more than offset by lowering your utilization rate and by increasing your total credit limit, making sure to make on-time payments to the new card and adding to your credit mix.

Closed accounts can stay on your credit reports for up to 10 years and increase the average age of your accounts during that time. But once the account drops off your credit reports, it could lower this factor, and hurt your scores. The impact could be more significant if the account was also your oldest account.

4. Credit mix and types

Having experience with different types of credit, like revolving credit card accounts and installment student loans, may help improve your credit health.

Since your credit mix is a minor factor, you probably shouldn’t take out a loan and pay interest just to add to your credit mix. But if you’ve only ever had installment loans, you may want to open a credit card and use it for minor expenses that you can afford to pay off each month.

5.  Recent credit

Creditors may review your credit reports and scores when you apply to open a new line of credit. A record of this, known as an inquiry, can stay on your credit reports for up to two years.

Soft inquiries, like those that come from checking your own scores and some loan or credit card prequalifications, don’t hurt your scores.

Hard inquiries, when a creditor checks your credit before making a lending decision, can hurt your scores even if you don’t get approved for the credit card or loan. But often a single hard inquiry will have a minor effect. Unless there are other negatives marks, your scores could recover, or even rise, within a few months.

The impact of a hard inquiry may be more significant if you’re new to credit. It can also be greater if you have many hard inquiries during a short period.

Don’t be afraid to shop for loans, though. Credit scoring models recognize that consumers want to compare their options. So multiple inquiries for mortgages, auto loans and student loans from a single 14- to 45-day period (depending on the loan and credit scoring model) may be treated as a single inquiry when calculating your scores.

Bottom line

There are many credit scores, and you may not know which one a lender is going to use when considering your application. However, consumer credit scores, which are determined based on the information in your consumer credit reports, weigh factors in a similar manner. If you focus on improving these factors, you could improve your credit health across the board.

What Is A Good Credit Score?

There’s no one definition of a good credit score. That’s because there are several different credit scores that depend on different scoring models with different score ranges, and different lenders have their own standards for rating credit scores.

That being said, scores starting in the high 600s and up to the mid-700s (on a scale of 300 to 850) are generally considered to be good.

How A Good Credit Score Can Help You

A credit score is a numeric representation, based on the information in your credit reports, of how “risky” you are as a borrower. In other words, it tells lenders how likely you are to pay back the amount you take on as debt.

Credit scores are one piece of the puzzle that lenders look at to determine whether or not to lend to you. A good credit score can help you get access to a greater variety of loan offers. And if a lender approves your application for credit, a good or excellent credit score can help you qualify for lower interest rates and better terms.

In general, the higher your scores, the better your chances of getting approved for loans with more-favorable terms, including lower interest rates and fees. And this can mean significant savings over the life of the loan.

Having a good score doesn’t necessarily mean you’ll be approved for credit or get the lowest interest rates though, as lenders consider other factors, too. But understanding your credit scores could help you decide which offers to apply for — or how to work on your credit before applying.

Credit Score Ranges

There are many different credit-scoring models, and each one uses a unique formula to calculate credit scores based on the information in your credit reports. Even the best-known credit-scoring companies, FICO and VantageScore, have multiple credit-scoring models that produce different scores. (Credit Karma offers free VantageScore 3.0 credit scores from Equifax and TransUnion.)

But while there are many different credit scores, the most common models all use a scale ranging from 300 to 850. Within this scale, there are some general credit score ranges that can help you interpret what your scores mean.

Here are the credit score ranges to be aware of and what they mean for you.

Poor credit scores: 300 to low-600s

Having poor credit scores can make it difficult to get approved for a loan or unsecured credit card. But a poor credit score isn’t a financial dead end. Certain financial products, like secured credit cards, can help people who are working on building their credit. These products can be a helpful stepping-stone to accessing credit with better terms — if you use them carefully.

Be aware of potential fees and higher interest rates with credit-building products. And make sure the issuer or lender reports to the three major consumer credit bureaus — Equifax, Experian and TransUnion — so that important actions, like when you make on-time payments, can contribute to your scores.

Fair To Good Credit Scores: Low 600s - mid 700s

While you’re comparing your options, know that applying for a new loan or credit card may result in a hard inquiry, which can have a negative impact on your scores. Loans with preapproval or prequalification options can give you an idea of the terms you might qualify for ahead of time.

Very Good And Excellent Credit Scores: Above Mid 700s

People with top credit scores are the most likely to be approved for loans and credit cards with low interest rates and good repayment terms. But having very good or excellent credit scores doesn’t mean you’re a shoo-in for every loan or credit card out there. A lender could deny an application for another reason, like a high debt-to-income ratio.

Regardless of your scores, it’s a good idea to keep an eye on your credit reports so that you’ll know what lenders will see once you apply for a loan.

What Is The Highest Credit Score You Can Get?

There are lots of different credit scores with different ranges out there. But for the major consumer credit scores, generally the highest credit score you can get is 850.

Keep in mind that perfect credit scores may not be necessary to qualify for great rates on loans and mortgages. Once you’re in the “very good to excellent” range, you likely won’t see much of a difference in terms of interest rate offers from, say, a 790 to an 840. Moving from a 650 to a 700 will likely have a more significant impact, which is why the general credit score ranges are important benchmarks to consider.

How Good Should My Credit Scores Be…

To Buy A House

With today’s market, you can purchase a home with a credit score as low as 620, which is the lower end of the “good” credit range. But credit requirements vary depending on your state.

To Rent An Apartment

Prospective landlords may run a credit check before you can sign a lease, but there’s no single credit score benchmark you need to hit to be able to rent an apartment. It can depend on the factors the landlord is looking for in a tenant, as well as where you’re looking to rent.

To Get Approved For A Credit Card

It’s possible to get approved for a credit card with poor credit — or even no credit at all. Once you know what range your credit scores fall into, you can research cards that suit you and your goals.

If you have no credit, look for secured cards or cards for beginners (like student cards). If you have limited or poor credit, secured cards or cards advertised for building or rebuilding credit could be a helpful leg up. Once you’ve improved your credit, you may be able to qualify for more-enticing offers, such as rewards cards or balance transfer cards.

To Get Approved For A Car Loan

You may be able to get approved for a car loan with a poor credit score, but it could be more difficult to find one to qualify for, and you could face high interest rates. If you’re still working on your credit and can’t wait to take out a car loan, consider asking a trusted family member or friend to act as a co-signer, or see if you can put down a larger down payment.

Good credit scores can mean better terms, but it’s still worth comparison shopping.

FAQs

How do I get a good credit score?
Building a good credit score can take time. Here are some general practices we recommend that can help you stay on the right track.

• Check your reports. Knowing your scores and being aware of what’s on your credit reports is the first step to working on your credit. You can check your credit reports from Equifax and TransUnion for free on Credit Karma. Credit Karma also offers free credit monitoring.

• Pay on time. Your payment history is a major factor in your credit scores.

• Pay in full. Keeping your credit card balances low can not only save you money on interest, but can also help keep your credit utilization rate down. Your credit utilization rate is how much of your available credit you’re using. A good rule of thumb is to keep it below 30% of your total credit limit.

• Don’t close old credit accounts. A longer credit history can help increase your credit scores by showing that you understand credit and have been using it for a long time. Keeping your oldest accounts open can ensure that your overall credit history continues to age.

• Consider your credit mix. Your credit mix reflects the different types of credit you have on your reports, from credit cards to student loans. We don’t recommend applying for a loan just to get another type of credit account on your reports, but it’s good to know that this can factor into your scores.

How long does it take to get a good credit score?

It depends on where you’re starting from and what challenges you’re facing. But building good credit probably won’t happen overnight.

If you’re brand new to credit, it could take months of using beginner products like secured cards to make significant progress in the types of financial products you qualify for. If you have dings on your credit reports, like late or missed payments or a bankruptcy, it could take years for those derogatory marks to fall off and stop affecting your scores.

But even if you have years left before those derogatory marks officially fall off, you can still see significant progress. The important thing is to work steadily toward getting your credit in good shape and understand that building credit is a journey.

How do I find out what my credit scores are?

You can get your scores from Equifax and TransUnion for free on Credit Karma. Checking your own scores won’t hurt your credit. And you’re entitled to free credit reports from Equifax and TransUnion each year with details about important credit factors so that it’s easy to track your progress.

What Is A VA Loan?

What is a VA home loan?

The US Government's VA loans program helps veterans, active-duty service members and their families qualify for a home loan. Though they are issued by private lenders like Guaranteed Rate, VA home loans are backed by the US Department of Veterans Affairs. Created during World War II to help returning service men and women purchase homes, this program has guaranteed over 22 million VA loans since 1944.

VA home loans feature no down payment or private mortgage insurance (PMI) requirements, making them a great choice for any veteran or active service member looking to purchase a home. Since the housing market collapse of the 2000s, VA home loans have become even more critical in the wake of stricter lending requirements. For this reason, a guaranteed VA loan is often the best and easiest way for veterans to purchase a home of their own.

What are VA home loan requirements?

A VA loan is a no-brainer for qualified homebuyers and refinancers. The intended candidate is a service member or surviving spouse with a clean financial record. Ask yourself these four questions to determine if you meet the minimum VA home loan requirements:

• Are you a current or ex-military personnel?

• Are you the surviving spouse of a current or ex-military personnel?

• Have you defaulted on a home loan within the last 12 months?

• Have you declared bankruptcy within the last two years?

If you answered "YES" to either of the first two questions and a resounding "NO" to questions three and four, you most likely meet the basic VA home loan requirements.

Other VA home loan requirements have to do with military service time. Specifically, you must have serve for 90 or more days in wartime or 181 or more days in peacetime. In both cases, the stipulation is waived if you are discharged due to a service-related disability. Reserves and National Guard soldiers must serve for at least 6 years to be eligible.

Spouses of deceased service members are eligible for VA loan benefits, provided they have not remarried and that the deceased either:

• Died in service or from a service-related disability.

• Was missing in action or a prisoner of war for at least 90 days.

• Was rated totally disabled and was eligible for disability compensation at the time of death.

Children of deceased veterans are not eligible for VA loan benefits.

The VA loan home advantage

VA loans are fully backed by the government and offer a myriad of advantages for your home purchase or mortgage refinance. Here are the six biggest:

No money down

While conventional loans generally require down payments that can reach up to 20%, no such thing is required with a VA home loan at or under the local conforming limit. Down payments are still an option, of course, but they are not a requirement. The VA allows you to purchase jumbo loans, but requires you to supply 25% of the difference between the loan amount and the loan limit.

No PMI

Private Mortgage Insurance (PMI) is a requirement when you put less than 20% down on the purchase of a home and typically adds 0.2-0.9% of expenses to your monthly mortgage. With a VA loan, you can wave goodbye to PMI!

Competitive interest rates

Since VA loans are guaranteed by the federal government this can provide lenders with a greater sense of safety and flexibility. This can ultimately lead to a more competitive interest rate than you may otherwise receive.

Easier to Qualify

Similarly to the interest rates, the VA loan being backed by the government also lets the banks assume far less of the risk. This can lead to less stringent qualification standards, once the aforementioned qualifications are met.

Fewer credit restrictions

Reduced restrictions mean easier qualification. With a VA loan, you’re allowed a higher debt-to-income ratio and afforded more leniency with your credit score.

Seller assistance

The VA allows sellers to assist with up to 4% of closing costs.

Easy refinance

Borrowers can refinance their homes with a VA streamline or cash-out loan. The streamlined version lowers the mortgage rate of an already existing VA loan, usually for less than the current principal and interest. This means it doesn't require a credit check or appraisal. The cash-out option involves a credit check and appraisal, since the home’s value represents the maximum loan amount and the new loan will be larger than the existing loan.

What Is An FHA Loan?

FHA home loans are mortgages insured by the federal government through the Federal Housing Administration (FHA), a branch of the Department of Housing and Urban Development. FHA home loans reduce the barrier to entry for homebuyers and refinancers by featuring low down payments, flexible credit requirements and more purchase power. If funds are limited, an FHA home loan can help you finance more than 80% of your home value.

What are FHA loan requirements?

In order to ensure that you meet the minimum FHA loan requirements, you need to consider the following factors.

• Are you over the age of 18?

• Do you have a valid Social Security number and lawful residency in the United States?

• Do you have a steady employment history? If not, have you at least worked for the same employer for the past two years?

• Can you afford the minimum down payment of 3.5% or 10% (depending on credit score)?

• Do you have a credit score above 620?

• Have you been out of bankruptcy for at least the past two years?

• Will this home be your primary residence?

You’ll likely need to be able to answer all of these questions with a hearty ‘YES’ in order to meet FHA home loan requirements.

The FHA home loan advantage

FHA home loans are backed by the federal government and offer you a myriad of advantages for your home purchase or mortgage refinance.

Minimum down payment option of 3.5% for qualified buyers

For those with credit scores of 620 and above, the down payment for an FHA loan is 3.5%. (For those with credit scores below 620, a 10% down payment is required.)

Easier to qualify

FHA requirements are, typically, less strict than typical loans. Although a credit score below 620 does not allow you to take advantage of the 3.5% down payment option, conventional lenders require a minimum credit score of 620 or higher.

No maximum income restrictions

Seller assistance with up to 6% of closing costs

FHA home loans allows the seller to pay up to 6% of the closing costs, including any costs of the appraisal, title expenses and a credit report.

203k renovation loans with a minimum 620 FICO score.

If you need extra cash to repair or renovate your home, FHA offers 203(k) loans that offer you loans based not on the current appraised value of the home, but the projected value after these renovations would take place. The extra money you receive from the loan after the purchase of the home can then go towards these renovations. This can be used to cover painting, roofing, plumbing, heating and air-conditioning and full room remodels. This is generally only eligible for those with a credit score of 620, more along the lines of a minimum credit score for a conventional loan.

Loan limits adjusted annually

FHA home loans have a maximum loan amount (or “ceiling”) that is regularly adjusted every year and vary according to the cost of living in a given area. This annual adjustment increases your likelihood of getting an FHA home loan that meets your current needs.

With an FHA loan, you can use borrowed money and other gifts from family members to cover down payments and closing costs. And don’t worry about prepayment penalties! An FHA loan lets you refinance or pay off your home early without having to deal with extra fees or other sticking points. As long as you meet FHA requirements, an FHA home loan may be within your future!