Credit Score Factors

Why This Matters

Your credit score isn't just a number—it's a three-digit summary of your financial trustworthiness that lenders, landlords, and even employers use to make decisions about you. Understanding how credit scores work connects directly to broader personal finance concepts you'll be tested on: risk assessment, debt management, opportunity cost, and financial planning. When you know what drives your score up or down, you can make strategic decisions that open doors to lower interest rates, better housing options, and improved financial flexibility.

Here's the key insight: credit scoring models weigh different factors differently, and the two biggest factors—payment history and credit utilization—account for roughly 65% of your score. Don't just memorize the list of factors; know why each one matters to lenders and how they interact with each other. That's what exam questions will test you on.

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Behavioral Factors: How You Use Credit

These factors reflect your day-to-day credit management habits. Lenders view these as the strongest predictors of future behavior because past actions tend to repeat.

Payment History

• Accounts for ~35% of your credit score—the single most influential factor in credit scoring models
• Late payments stay on your report for up to 7 years, with recent delinquencies hurting more than older ones
• Consistency matters more than perfection—a long track record of on-time payments can help offset occasional mistakes

Credit Utilization Ratio

• Measures credit used ÷ total available credit—this is a snapshot calculation that changes monthly
• Keep utilization below 30% to avoid score penalties; below 10% is ideal for maximizing points
• High utilization signals financial stress to lenders, even if you pay your balance in full each month

Total Debt

• Represents your overall debt burden across all accounts—credit cards, loans, and lines of credit combined
• High total debt raises red flags about your ability to take on and repay new obligations
• Debt-to-income ratio (a related concept) is often evaluated separately by lenders during applications

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History Factors: Your Credit Track Record

These factors evaluate how long you've been managing credit. Lenders prefer borrowers with established histories because longer track records provide more data for predicting future behavior.

Length of Credit History

• Accounts for ~15% of your score—calculated using average age of accounts and age of oldest account
• Closing old accounts shortens your history and can unexpectedly drop your score
• New borrowers face a catch-22: you need credit to build history, but lack of history limits access to credit

Public Records (Bankruptcies, Liens, Judgments)

• Bankruptcies remain on reports for 7-10 years—Chapter 7 stays longer than Chapter 13
• Severely damages creditworthiness because it represents the most extreme form of payment failure
• Even after removal, lenders may ask about bankruptcy history on applications

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Portfolio Factors: What Types of Credit You Have

These factors assess the diversity and composition of your credit accounts. A varied portfolio suggests you can handle different repayment structures and credit responsibilities.

Types of Credit Accounts (Credit Mix)

• Includes revolving credit (credit cards, lines of credit) and installment loans (mortgages, auto loans, student loans)
• Diversity demonstrates versatility—managing multiple account types shows broader financial capability
• Accounts for ~10% of your score—important but not worth opening unnecessary accounts just for variety

Available Credit

• Total credit limits across all accounts minus current balances equals your available credit
• Higher available credit improves utilization automatically, even without changing spending habits
• Signals financial stability to lenders—you have access to credit but choose not to use it all

Credit Limit Increases

• Improves utilization ratio instantly if spending stays constant—same balance with higher limit = lower percentage
• May trigger a hard inquiry when requested, causing a small temporary score dip
• Strategic timing matters—request increases when your score is strong and income has grown

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Inquiry Factors: How You Seek New Credit

These factors track your applications for new credit. Frequent applications can signal financial desperation or overextension, which concerns lenders.

New Credit Inquiries

• Hard inquiries occur when applying for credit cards, loans, or mortgages—each can lower your score by 5-10 points
• Multiple inquiries within 14-45 days for the same loan type (like mortgage shopping) typically count as one inquiry
• Soft inquiries don't affect your score—checking your own credit, pre-approval checks, and employer screenings are all soft pulls

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Quick Reference Table

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Self-Check Questions

1. Which two credit score factors together account for approximately 65% of your score, and why do lenders weight them so heavily?

2. Compare and contrast credit utilization ratio and total debt. How could someone have low utilization but still be considered a risky borrower?

3. If a student has only had one credit card for six months, which credit score factors are likely hurting their score the most, and what strategies could improve it without taking on unnecessary debt?

4. Explain why closing your oldest credit card account could lower your score even if you never use that card anymore. Which two factors would be affected?

5. A consumer is shopping for a mortgage and applies to four different lenders in one week. How will this affect their credit score differently than applying for four different credit cards in one week? What principle explains the difference?