All credit scores are based on the contents of our major credit reports. Your score’s exact calculation, however, will vary by credit-scoring model and the credit bureau reporting the information, which means the factors that move the needle might differ to a certain extent as well. But since all roads ultimately lead back to your credit report, that’s where you should focus.
Below, we explore the most common reasons for credit-score change — both positive and negative — in order to help you avoid potential pitfalls and achieve top financial fitness as quickly as possible. To see how you score across these dimensions, simply join WalletHub for free and click the “Credit Analysis” tab once your account is activated. Stay safe out there, and keep those scores soaring!
- Payment History
Payment history — more specifically, the percentage of required monthly payments that you’ve made on time — is the single largest component of most credit scores, accounting for more than one-third of your overall score. Establishing a long track record of prompt payments on your loans and lines of credit is therefore essential to credit-score improvement, whereas numerous late payments pull your rating down. The more accounts you pay late and the later your payments become, the more the damage will intensify.
|How WalletHub Grades Payment History|
The following grades reflect WalletHub’s interpretation of how your on-time payment percentage — the number of payments you’ve made on time divided by all those that have come due — can be expected to impact your credit standing.
|A||100% on-time payments|
|B||99% on-time payments|
|C||98% on-time payments|
|D||< 98% on-time payments|
- Credit Utilization
If much of your money is already earmarked for debt obligations, the risks involved with lending you additional funds would obviously be greater than if you had plenty of disposable income. Plus, hefty balances are often accompanied by an inability to pay, so they naturally raise red flags.
The manner in which debt obligations influence your credit score ultimately ebbs and flows over time along with your spending and payment habits. As such, minor fluctuations in your credit score are normal. For instance, your credit score might drop a bit if one month your spending is inflated by a couple of one-time expenses, whereas it could rise if you reduce your debt obligations.
|How WalletHub Grades Credit Utilization|
These grades are based on WalletHub analysis of credit data and reflect the sum of all your current revolving balances divided by the sum of your credit limits on all open accounts.
|A||< 10% utilization|
- Hard Credit Inquiries
A hard inquiry on your credit report effectively signals your intention to borrow money. And with an application process already in motion, all other lenders know that a portion of your spending power could soon be consumed by a new debt obligation. That, in a nutshell, is why applying for a credit card or a loan causes your credit score to dip temporarily.
Numerous hard inquiries in a relatively brief time period also reflect a worrisome desperation to borrow, a characterization that’s exacerbated when new accounts fail to follow. At least that’s the case with credit cards. When it comes to auto loans and mortgages, you’re given a bit of latitude to shop around: Inquiries made within a period of up to 45 days are either disregarded from scoring or treated as a single inquiry. Each individual credit-card inquiry, on the other hand, will remain on your credit report for up to two years.
With that being said, it is important to note that checking your own credit report through WalletHub will have no impact on your score. Such inquiries, as well as credit checks for employment purposes, are considered “soft.”
|How WalletHub Grades Hard Inquiries|
WalletHub’s hard credit-inquiry grades indicate how credit-scoring models and potential lenders are likely to view various short-term application rates.
|A||0–2 inquiries in the past 2 years|
|B||3–5 inquiries in the past 2 years|
|C||6–7 inquires in the past 2 years|
|D||8+ inquires in the past 2 years|
- Derogatory Marks
In addition to evaluating performance metrics such as payment history, prospective lenders will be on the lookout for more-serious issues, such as collections accounts and public records, which we’ll refer to here as derogatory marks. You can remember their importance this way: The presence of bankruptcies, tax liens or court orders to repay amounts owed on your credit report is enough to evoke some derogatory remarks from anyone. After all, such records convey significant financial difficulties and perhaps even a line of debt collectors headed by the government waiting at one’s proverbial doorstep.
In short, there’s really no good that can come from a derogatory mark on your credit report, save for the day when the record is removed from your file seven to 10 years in the future.
|How WalletHub Grades Derogatory Marks|
Derogatory marks can have an outsized impact on your credit in limited numbers, which is why WalletHub’s grades penalize the presence of just one public record or collections account on your credit report.
- Age & Experience
Your credit score is ultimately a prisoner of time. It takes time to graduate from newcomer status and even longer to rebuild from mistakes. After all, negative information takes seven to 10 years to come off your credit report, depending on the type, and roughly 15% of your overall score is earmarked for the length of your credit history.
Another often overlooked component of your credit score, “Types of Credit Used,” demands a diversity of experience — such as a combination of credit cards and installment loans — that is dangerous to ever rush. You can’t truly elevate your credit standing until you have demonstrated proficiency with various types of borrowing vehicles, but you don’t want to buy a house or a car, for example, until you’re in the position to do so responsibly.
Plus, it’s important to note that the longer your track record of responsible borrowing is, the more leeway you have for the occasional slip-up. A single missed payment amid years of promptness, for instance, definitely won’t affect your credit score as much as a missed payment with no positive context.
|How WalletHub Grades Age|
WalletHub estimates the impact of age on your credit standing by averaging the length of time each of your current tradelines has been open.
|How WalletHub Grades Experience|
WalletHub uses the diversity of your credit record as a proxy for experience, assigning grades based on how many different types of tradelines you have used.
|A||9-year+ average||A||4 types|
|B||7- to 8-year average||B||3 types|
|C||5- to 6-year average||C||2 types|
|D||0- to 4-year average||D||1 type|
This is by no means an exhaustive list of the countless factors that can influence your credit score, as only the proverbial keepers of the keys — credit-scoring companies — have all the answers. But this information should help you understand your credit score better and take steps to ensure that it keeps rising.
And if you have yet to sign up for your free credit score, full credit report and 24/7 credit monitoring from WalletHub, make sure to give it a try. There’s no better way to learn what affects your credit score than monitoring how it changes with WalletHub’s daily updates.
Image: HenriEnsio / iStock.