What affects your credit score, and what does not

What a credit score is

A number, usually 300 to 850, built from your credit report.

The FTC describes a credit score as a number, typically between 300 and 850, that estimates how likely you are to repay a loan and make payments on time. Scoring systems differ, but the one most lenders use is the FICO score. Lenders use it to decide whether to give you credit and on what terms, including the interest rate; cellphone companies and auto and home insurers use credit information too. Because the score is computed from your credit report, an error in the report can lower it.

The five common factors

What scoring systems look at, in the FTC’s words.

1. Paying on time. Late payments, accounts sent to collections, and bankruptcy are likely to hurt.
2. How much you owe against your limits. Owing close to your credit limit will probably hurt.
3. How long you have had credit. A short history may hurt, but on-time payments and low balances can offset it.
4. Recent applications. Each application shows as an inquiry; applying for too many accounts recently could hurt.
5. How many accounts, and what kinds. Existing accounts can help, too many credit cards may hurt, and under some systems debt consolidation loans may hurt while mortgages and car loans do not.

Systems weigh these differently, and some mortgage scoring models also consider your down payment, total debt, and income.

How much of your limit you use

A worked example.

“Maxed out” is measured against your limits. Someone with two cards, limits of $3,000 and $7,000, owing $4,500 in total, is using 45% of $10,000 of available credit. Paying the balance down to $1,500 cuts that to 15%. Closing an unused card with no balance shrinks the total limit, so the same debt becomes a larger share. The FTC’s advice is to pay down outstanding balances; it does not set a target percentage.

Inquiries that do not count

Checking your own report is not applying for credit.

The FTC notes that not every inquiry counts. Inquiries from creditors monitoring an account you already have, and from companies sending prescreened credit offers, are not counted against you. Several mortgage lenders checking your credit within a short time often count as a single inquiry, which makes shopping for a rate reasonable. Checking your own reports, free every week at AnnualCreditReport.com, is not an inquiry about new credit, and the Consumer Financial Protection Bureau says it has no effect on your score. Federal law also bars creditors from considering race, sex, marital status, national origin, or religion.

Seeing your score, and improving it

Time and habits, not tricks.

Unlike your free reports, you often have to pay to see your score, and some “free score” offers sign you up for paid credit monitoring; check the terms. If your score was a factor in denying you credit or giving you worse terms, the business has to tell you which bureau supplied the information and include the score in its notice. To improve a score, the FTC points to three habits: pay bills on time, pay down balances, and avoid opening several new accounts at once. It adds that a big improvement will probably take time. For how interest rates compound on what you owe, see APR and APY.