How Does Your Credit Score Affect Your Future?

A credit score is a number that lenders and creditors use to determine your level of risk. A high score means businesses view you as a low-risk borrower and you may qualify for loans, credit cards and housing with lower interest rates.


A lot goes into determining your credit scores, and it’s important to understand the factors that influence them. Paying on time, keeping debt levels low and having a mix of accounts are key.

Payment History

Payment history is a significant part of your credit score. It reflects a detailed list of past bills and whether you paid them on time or not. It includes your credit card bills, revolving accounts like student loans or home equity loans and even installment debts such as car or mortgage payments. Generally, information about your payment history stays on your credit report for a set amount of time. However, you can file a dispute with the credit bureau to get it removed early if you believe an account has been wrongly reported as paid late.

In general, a late payment on your credit report will hurt your credit score. Lenders typically only report late payments to credit reporting agencies if they’re 30 days overdue, so making your payments on time is a big factor in maintaining a good credit score.

In fact, paying your bills on time is the single most important thing you can do to maintain a good credit score. In addition to making on-time payments, you can also work with your creditors to lower your interest rates, negotiate a repayment plan or even talk with a credit counselor about how to manage your debts. The more you can do to improve your payment history, the better your credit scores will be. This will make lenders and businesses more confident when evaluating your application for credit or insurance, which can help you save money.

Amounts Owed

The amount of debt you owe makes up 30% of your credit score. This includes credit card balances, installment loan (auto or mortgage) balances and other types of outstanding debt. The most important part of this criterion focuses on how much you owe on revolving accounts (credit cards) in relation to your total credit limit, a metric known as “credit utilization.” It is recommended that you keep the proportion of your revolving credit account balance to its credit limit as low as possible.

Other parts of this criterion include your payment history on other types of open revolving and installment accounts, the number of new revolving or installment loans you’ve opened recently and the number of accounts reported to the credit bureaus as delinquent or in collection. Public records such as suits, liens and foreclosures are also factored in.

Generally speaking, paying off all your debts in full and on time is good for your credit scores. However, closing some of your credit accounts could hurt your scores if those are the only revolving or installment loans on your report. Opening a few new lines of credit in a short period of time might also lower your credit score. This is because lenders consider it risky to extend credit to someone who has recently applied for many lines of credit.

Length of Credit History

The length of credit history is a factor that makes up 15 percent of the FICO score and 20 percent of the VantageScore credit score (in combination with the age of your oldest and newest accounts, as well as the type of accounts you have, which is sometimes called “credit mix”). The longer your credit history, the better it is for your credit scores. This is because lenders are more comfortable lending to customers who have a long track record of responsible credit use.

However, a good credit history can still be built up even if you have a short credit history, as long as other factors like your payment history and credit utilization ratio are strong. The credit utilization ratio, for example, measures how much of your total available credit you’re using on revolving accounts like credit cards. This is important because it shows lenders that you can responsibly manage a balance over time without going into debt or risking paying late.

A new late payment will likely cause your credit scores to drop a bit, but you’ll recover quickly if you make all of your future payments on time. Overall, your credit score will improve as you build a solid credit report and continue to demonstrate responsible credit usage. This is why it’s so important to check your credit reports regularly, and to pay your bills on time every month.

Types of Accounts

Credit bureaus also look at the types of credit accounts you have on your reports, such as revolving (credit card) and installment loans (car loans, personal loans, mortgages). Generally speaking, having a mix of both revolving and installment accounts will help your scores.

How much you owe and your credit utilization ratio, which is how much you’re using compared to how much you have available, factor into your score. Having high balances and maxed-out credit cards will lower your score, while having smaller balances on revolving accounts will raise it.

Another important consideration is how many times you’ve applied for credit in recent months. Each time you apply, the credit bureau makes what’s called a hard inquiry into your report, which can temporarily lower your score. A number of these hard inquiries in a short period of time can indicate to lenders that you’re taking on more debt than you can reasonably expect to pay back.

Lenders order a credit report on applicants to get an overview of their financial history and determine their creditworthiness. They then use their own formulas to decide whether or not to loan you money, and they typically make these decisions based on the information in your credit report at that point in time. A credit score provides a lender with a fast and easy way to summarize your credit history, which can ultimately save them time and effort while making the lending process faster for you.