Factors That Affect Your Credit Score: Example with Strategy to Improve

Factors That Affect Your Credit Score

Understanding the factors that affect your credit score is important for managing your financial condition.

A credit score is a numerical value that represents your creditworthiness, which lenders use to determine your ability to repay borrowed money. This guide lets you know about the factors that affect or influence your credit score and offers strategies to improve your credit score. 

1. Payment History

Your payment history is the most important factor that affects your credit score, accounting for approximately 35 percent of the total score. This shows whether you make your payment on time, including your credit card bills, loans, and other financial obligations. Late payments, defaults, and bankruptcies can severely damage your credit score. 

Real-World Example

For example, if you miss a payment on a credit card, the late payment can remain on your credit report for up to seven years, which can significantly impact your score. According to the Consumer Financial Protection Bureau (CFPB), a single missed payment can decrease or lower your credit score by as much as 100 points, depending on your overall credit profile.

Strategy to Improve

If you want to maintain a positive payment history, set up automatic payments or reminders for due dates. This approach will help you avoid missed payments and maintain a strong credit profile. 

2. Credit Utilization Ratio

The credit utilization ratio measures the amount of credit you are using compared to your total available credit. It accounts for about 30% of your credit score. A lower credit utilization ratio indicates that you are using a smaller portion of your available credit, which is seen positively by lenders.

Real-World Example

Suppose your credit limit is $10,000 and you have used $3,00 0; you are using 30% of your limit. If you use more credit and your balance goes up to $5,000, now you are using 50% which is high. High use of your limit can hurt your credit score. The FICO scoring model recommends keeping your credit utilization below 30% for optimal scoring.

Strategy to Improve

To improve your credit utilization ratio, always aim to pay down your balance and avoid using more than 30% of your credit at any time. You can consider requesting a credit limit increase, which can help you to lower your utilization ratio without increasing your spending. 

<<More about Credit Utilization Ratio: Calculate Your DTI Ratio

3. Length of Credit History

Maybe you know 15% of your credit score comes from how long you have had credit. Lenders look at how long your accounts have been open and the average age of your accounts. Your experience and how you handle your credit are measured by your credit history. 

Real-World Example

Let's consider you have a credit card for 10 years and another that you opened recently. If you close your older account, your average account age will be lower. Closing old accounts can negatively impact your credit score, no matter that you have a good payment history.

Strategy to Improve

If you want to maintain a healthy credit history, make sure you keep your older accounts, even if you don't use them frequently. This strategy will help to maintain your average account age and can positively influence your credit score over time.  

4. Credit Mix

The variety of your credit accounts refers credit mix. This includes revolving credit (credit cards), installment loans (personal loans, auto loans), and mortgages. This factor accounts for about 10% of your credit score. A diverse credit mix can indicate to a lender that you can manage different types of credit responsibly. 

Real-World Example

Let's take an example, if you have only credit cards and no instalment loans, which shows a low credit mix, less favourable than someone with a combination of credit cards, a car loan, and a mortgage. According to the Federal Reserve, individuals who have a diverse credit mix tend to have higher credit scores.

Strategy to Improve

To improve your credit mix, apply for multiple types of credit responsibly. For example, if you have only credit cards, go for a small personal loan or financing a car, provided that you can manage the payment responsibly. 

<<Deep Dive: 4-Week plan to Build Credit: It’s Your Time to Take Control

5. New Credit Applications

Applying for a new credit, a hard inquiry is recorded on your credit report. Multiple hard inquiries in a short period indicate that you are having a problem related to money, which can hurt your score. 

Real-World Example

Applying for multiple credit cards in a month, each credit card application results in a hard inquiry, which can reduce your credit score. According to the Consumer Financial Protection Bureau (CFPB), too many hard inquiries can negatively impact your credit score if you do this in a short period. 

Strategy to Improve

If you want to reduce the effect of a new credit application, don't apply for a credit card in a short period of time, but space out your application over time. Before applying for new credit, consider your situation, whether you need I,t and whether it aligns with your financial goalss. 

6. Outstanding Debt

The other critical factor that affects your credit score is outstanding debt. The high amount of outstanding debt can indicate overleveraging to lenders, which can negatively impact your creditworthiness. 

Real-World Example

Let's consider an example: if you have a total income of $30,000, and your outstanding debt is $20,000, your debt-to-income ratio is 67%. The is too high and a red flag for lenders, as they may see you as a higher risk. The Federal Reserve reports that a lower debt-to-income ratio is generally associated with better credit scores.

Strategy to Improve

To improve your credit score, focus on paying down outstanding debt. Create a plan to tackle high-interest debts first, as this can save you money in interest payments and improve your credit profile.

To improve your credit score, you should focus on paying down outstanding debt. Create a strategy fohigh-interestst debt first, so that you can increase your credit score. 

Deep Dive: Pay Off Debt Fast: Strategies That Work in 2025

7. Hard Inquiries

Hard inquiries occur when a lender checks your credit report in the process of decision-making process for a new credit application. Each and every hard inquiry can decrease your credit score by a few points. Hard inquiries remain on your credit report for two years. 

Strategy to Improve

To minimize the impact of hard inquiries on your credit score, limit the number of credit applications you submit within a short timeframe. If you are shopping for loans, do so within a focused period (typically 30 days) to minimize the impact of multiple inquiries.

To overcome the impact of hard inquiries on your credit score, you should limit the number of credit applications you submit in a short period. If you are seeking a loan, do this with a focused period (typically 30 days) to minimize the impact of multiple inquiries. 

Factor	Significance	How It Affects Credit Score
Payment History	Most Critical	When you consistently pay bills on time, it raises your score; if you are late or miss payments results in major drops.
Credit Utilization	Highly Influential	When you use a high percentage of your available credit, it lowers your score. Keeping utilization low helps improve it.
Length of Credit History	Moderately Important	Longer credit histories show reliability, boost your score; short histories provide less data.
New Credit	Less Impactful	Opening many new accounts or frequent credit inquiries can reduce your score.
Credit Mix	Contributes Positively	Having different types of credit (loans, credit cards) shows experience managing credit, which improves your score.

8. Account Age Distribution

The age of your credit accounts is another factor that can affect your credit score. This considers the average age of all your accounts and how long your old accounts have been open. When you have a longer average account age, it can impact your credit score. 

Strategy to Improve

You can improve your score by keeping your older accounts open, even if you don't use them. This strategy helps maintain a longer average account age, which can positively influence your credit score. 

9. Public Records & Collections

Public records, such as bankruptcies, foreclosures, or tax liens, can affect your credit score. These records remain on your credit report for several years and can indicate to lenders that you have experienced significant financial difficulties.

According to the Consumer Financial Protection Bureau (CFPB), individuals who have filed for bankruptcy may find it challenging to secure credit in the future.

Strategy to Improve

If you have public records on your credit report, focus on rebuilding your credit through responsible credit management. Make timely payments and reduce your outstanding debt to demonstrate to lenders that you are capable of managing credit responsibly.

When you have public records on your credit report, you should focus on rebuilding your credit. Maintain a good payment history, reduce your debt to show the lender that you are capable of managing credit responsibly. 

10. Errors on Your Credit Report

Errors on your credit report can negatively affect your credit score. Common errors include incorrect account balances, accounts that do not belong to you, or late payments that were made on time. It is essential to regularly check your credit report for inaccuracies.

When you have errors in your credit report, it negatively impacts your credit score. The common errors are incorrect account balances, accounts that do not belong to you, or late payments that were made on time.

Real-World Example

According to the Federal Trade Commission (FTC), approximately 1 in 5 consumers report finding errors on their credit reports. These errors can lead to lower credit scores and difficulty obtaining credit.

Strategy to Improve

To improve your credit score, review your credit report at least once a year. If you find any errors, report them and solve them. Maintaining accurate credit information is crucial for ensuring your credit score reflects your true creditworthiness.