The Biggest Impact On Your Credit Score – Top 5

Ready to stop struggling to get approved for cars and other loans by building your credit and want to know the impact on your credit score each factor has to know where to start? Then keep reading

There is so much information that goes into calculating a credit score. It seems like everywhere you go, people are using your credit score to decide your fate. Understanding what affects your credit score can help you make smarter financial decisions and improve your financial health. Let’s break it down and see how you can use this knowledge to boost your credit score!

• The 5 Factors Affecting Your Credit Score
• The Factors That Have the Biggest Impact on Your Credit Score
• The Impact of New Credit on Your Score
• How Credit Mix Impacts Your Credit Score
• Length of Credit’s Impact on Your Credit Score
• Did You Know Your Total Debt Has An Impact on Your Credit Score?
• The Biggest Impact on Your Credit Score
• How Budgeting Can Help You Use These Impacts in Your Favor
• FAQs

Your credit score is like a financial report card. Five key factors determine your score. Previously, we created a video that broke down those factors. Just in case you haven’t watched our video on the factors affecting your credit, I’ll do a quick summary

1. New Credit

2. Types of Credit or Credit Mix

3. Length of Credit or Credit Age

4. Total Debt

5. Payment History

If you’d like to go a little more in-depth to understand these better, check out this article: Top 5 Factors Affecting Your Credit Score

We are going to rank those 5 factors from the least impact to the largest impact they have on your credit score. You’ll also see how there is a timeframe that each of these factors sticks around for.

Once you see the true impact of these 5 factors, you’ll be able to know exactly what you need to do to build your credit and keep it strong. Plus, we’ll be providing some tips on how you can control each factor.

Impact: 10% of your credit score or 5-10 points per inquiry

When you apply for new credit, it affects your score by 10%. While it might seem small, too many new applications can hurt your score. 

Time: 2 years

Any new applications will stamp your credit report for the next two years. Every other lender will be able to see this as well and will have an idea of all the places you may have been denied.

Tips:

• Apply Wisely: Only apply for credit when necessary and when you plan on buying within that week. You have a shopping window provided to you by the bureaus but don’t drag it out to the end. 

Timing Matters: Align major credit applications with significant purchases, like buying a house. Hold off on applying for any other credit until you’ve got your home.

Impact: 10% of your credit score.

This technically ties with New Credit with the same impact percentage of 10%. Having a mix of credit types is important. This includes revolving credit (like credit cards) and installment credit (such as car loans). It is important to not just have one type of credit only, companies like to see that you can handle different types of credit.

Time: N/A

Your credit mix is not weighted directly off of time. It represents how well you can handle different types of loans. The more types of loans you have and the longer you’ve had them will impact your credit score in a greater way.

Tips:

• Balance: Maintain a mix of both revolving and installment credit.
• Avoid Unnecessary Credit: Only open new accounts if needed. This is important. Even though a mix is desirable, taking out loans or lines of credit unnecessarily is not the answer. Just because it is available, doesn’t mean you need it.

Impact: 15% of your credit score

A longer credit history is beneficial. It shows lenders that you’ve been managing credit responsibly for a long time. A lot of people open and close credit lines and accounts often and this can negatively impact your credit without you realizing it even matters.

Time: Up to 10 Years

When you close an account, it removes all of the positive impact of it. However, any negative impact related to it can stay lingering around for up to 10 years. 

Tips:

• Keep Old Accounts Open: Even if you don’t use them, keeping old accounts open and in good standing helps your score. Unless they come with a fee, they will not hurt you to keep open. Actually, they will help you. But if they are causing you problems, such as you keep racking up a huge credit card bill for things you don’t need just because it is open, probably best to close that one out. Remove the temptation.

Manage Installment Loans: You can also consider keeping installment loans open for a while after paying them off. You could keep them 6 months or even a year, this will provide you with a longer payment history and a good history.

Impact: 30% of your credit score

Your total debt plays a big role. Keeping your debt under control is crucial for a good credit score. Companies do not want to see you are overextended. Even those with stellar credit scores would be a risk to a creditor if they start reaching that overextended amount.

Best way to think about overextending your debt is standing in a pool and not knowing how to swim. If the water is at your ankles, you are a whole lot less likely to drown. But if you walk deeper and that water is up to your mouth, that is a dangerous spot to be in. Your debt needs to stay at your ankles. 

Time: N/A

Total debt does not impact your credit score based on time. It is a calculation of how well you can balance your loans and how dependent you are on them. This can cause your score to improve or drop very quickly.

Tips:

• Stay Below 30%: Keep your credit card utilization below 30% of your limit. This means if you have a credit limit of $1,000, you should not use more than $300 (or 30%) of it at a time. The lower your usage, the better your score will be.

Monitor Debt: Regularly check and manage your total debt.

Impact: 35% of your credit score!

Payment history is the most significant factor. It shows how reliably you pay your bills over an extended period of time. Your past behaviors matter the most. If your history shows multiple late payments, repos, charge-offs, companies can probably expect that the same will happen again. You have to show them it won’t.

Time: Up to 10 years

Late and missed payments will be stamped on your credit history for 7 years for all lenders to see. This is a massive negative impact on your credit score that needs to be avoided. However, it doesn’t stop there. 

Any form of repossession, charge-off, or being sent to collections will also linger around for 7 years. If this gets to the point where your only option is to file for bankruptcy, you will have a ‘dark cloud’ that follows you around, negatively impacting your credit score for 10 years.

Tips:

• Pay On Time: Make all payments in full and on time. Late payments matter just as much as no payment.

Use Tools: Set reminders and automate payments to avoid late fees. Contact the companies you owe when something comes up to see if they can work with you instead of just not paying.

Budget is not a bad word, though a lot of people treat it as it is. Budgeting is a way to take control over your finances and shows you the areas that need the most attention. Your credit score is just a representation of your overall financial stability and the foundation is a strong budget.

Without a way to know where your money is really going each month, you are leaving it up to chance and hoping it will all work out. OR that you have no control. If you aren’t sure where to start with a budget, we can help. For a step-by-step on building a solid budget that will lead to great credit, check out this video right here.

Disclaimer: The information provided in this article is for educational purposes only. It is not financial advice. Always consult with a qualified financial professional for personalized guidance.