What Impacts Your Credit Score?

Published on January 10, 2020 by CreditFresh

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Learn what behaviors impact your credit score, so you know what behaviors to avoid when managing your bills, loans, and lines of credit.

If you’re wondering how your financial decisions might impact your credit history, just ask around. Everyone has opinions about how to improve their credit history, but their advice isn’t always helpful. What one person says may contradict what another person tells you, and it may be hard to know who’s right.

Sometimes, having a basic understanding of what you shouldn’t do can help you cut through questionable advice. Here we’ve listed some habits you’ll want to avoid and the reasons you should avoid the habits.

Check out this list to see what habits impact your credit score.  

1. Paying Bills Late

First in our journey exploring what impacts your credit score: paying bills late.

It happens to the best of us. Sometimes, life throws you a curveball that makes it hard to keep on top of things. You might get sick enough that you can’t work, an urgent repair may tie up your money in unexpected ways, or a family crisis may distract you from your finances.

But sometimes, you simply forget you owe money, and you don’t realize it until your creditor gently reminds you. But by this point, it may be too late. Even one missed payment may have a negative impact on your history.

Multiple missed payments may have an even greater impact, while an account that remains delinquent for months may leave behind a crater in your credit report. Left long enough, it might even evolve into a charge-off, collection, or repossession.

That’s not to say every late payment will end up this way. Keeping on top of your bills may help you avoid adding negative entries to your file.

If you’ve fallen behind on your bills, reflect on why you missed an important payment due date. Understanding the root cause of the problem may help you find the right solution.

Stop Overspending

Without a household budget, it’s easy to lose track of how, where, and when your money is going. You might unknowingly use the cash you need to pay for an essential like your water bill on something frivolous like concert tickets or a new baseball cap.

A budget can help you recognize your worst spending habits and make them a thing of the past. Sit down to track your expenses to see where your money goes in a typical month. Highlight those unnecessary purchases and cut them out. You can reroute this newly freed cash to go towards more important things.

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Make it Hard to Forget

If you miss bills because you have trouble remembering dates, stop banking on your ability to remember. Try out these tips instead:

  • Program important dates into your phone or computer’s calendar and set it so that you’ll receive a notification when it’s time to pay the bills.
  • Create a budget using a money management app and have it send you reminders of upcoming bills.
  • Set up automatic payments for regular, fixed expenses. You can set the size and frequency of these payments and then forget it. Your bank transfers the money according to the schedule you set.

Ask for Help

Sometimes, paying your bills late is the consequence of a situation outside of your control. If you’re experiencing significant difficulties preventing you from paying your bills, talk to your creditors. Explain to them why you haven’t paid them and ask if there’s a financing plan available.

It takes a lot of courage to make this phone call, but it might be worth it if your creditor agrees to a more affordable repayment plan.

2. Applying for Too Many Loans

In a tight spot, it’s natural to want to turn to personal loans and online lines of credit. They can help you out in financial emergencies, so you can take on unexpected expenses or urgent repairs you couldn’t otherwise afford.

But there is a time and place for loans. If you end up applying for loans, lines of credit, and credit cards frequently when you don’t need them, you may be doing harm to your credit.

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It depends on the financial institution. Sometimes when you request a line of credit online, a financial institution will use a soft credit check. A soft check has no impact on your credit score.

But some organizations may use a hard credit check. If they do, it gets recorded in your report, and it may dock as many as 20 points from your overall score.

How Many Loans is Too Many?

This is a tricky question to answer because it depends on a lot of variables. Everyone’s finances are unique, so the number of loans and the size of someone’s debt may not have the same effect across the board.

In terms of hard credit checks, it’s all about timing.

Multiple inquiries in a short period may have a big impact. This is especially true if you’re just starting to build your history, as you won’t have enough entries to temper the negative impact these checks may have.

As for the number of open accounts, there is no magic number.

There is, however, something called your DTI ratio. It stands for debt-to-income, and it’s a ratio that compares your debt payments to your earnings. Some creditors look at this ratio to see how much of your income you use to repay debt.

Generally, the lower your DTI, the better. However, 40 percent is a common manageable amount for many people.

If your DTI is higher than 40 percent, it suggests that a fair amount of your income goes to debt repayment. This may affect a financial institution’s willingness to lend you money. With your money tied up in existing debt, it may send along the message to financial institutions that you may not have enough cash in your budget to pay for additional loans.

3. Maxing out Revolving Credit

Revolving credit is the financial world’s way of talking about lines of credit and credit cards. These products work a little differently than the typical installment loan.

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With an installment loan, typically what happens is that you receive a lump sum of money that starts accruing interest right away. You’ll have a specific date by which you’ll have to repay the total loan, and you’ll have to reapply if you need more money.

Now let’s compare this to revolving credit.

If you receive a line of credit, it will have a credit limit. With a typical line of credit, you may use as much or as little of this limit as you need, but you’ll only start to accrue interest on what you use.

Your use will usually show up on your bill or monthly statement as your total outstanding balance. You’ll have to repay your balance by a certain date, and once you do, you’ll have access to your full limit again, usually without having to reapply again. Typically, you will be paying back the outstanding balance and any accrued interest through multiple minimum payments that combine outstanding principal and interest.

In general, your balance due on a revolving credit account like a line of credit or credit card may play an important role in your credit history and report. It depends on a financial institution. If it reports your payments to one of the major credit agencies, the agency will see how much of your credit you use compared to the total you have available. This little calculation produces a number that’s called your credit utilization rate.

As a general rule of thumb, you want a low utilization rate. This means you use your available credit reasonably. A high rate, on the other hand, suggests you’re frequently tapping into credit, which may suggest you have trouble managing your money.

Make Sure to Pay off the Full Balance

One of the benefits of a line of credit or credit card is its flexibility. In many cases, you’ll have the option of a minimum payment. Typically, this ends up being a fixed amount or a percentage of your balance. In either case, this payment is a tiny fraction of your full balance.  As long as you pay this minimum, you’ll contribute positive payment history to your file if the lender you’ve borrowed from reports payment activity.

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This comes in handy when you’re experiencing a tough month when money’s tight. It doesn’t take as much cash to cover the minimum, and by making this small payment, you’ll avoid late fees.

However, it’s not a great idea to rely on this every month when you don’t have to. By paying just the minimum, you’ll carry over a balance that may be subject to far more interest than you’d be paying if you paid off more of the outstanding principal. The longer you carry a balance, the more interest you’ll earn and the more money you’ll owe.  

It may also impact your credit utilization rate. If you continue to use your card while paying only the minimum, your utilization rate might increase. As this number grows, you may see an impact on your credit.

To limit how much money you owe and to potentially minimize the impact of your outstanding balances to your credit history, check in with your budget to see how you can pay off more of your balance each time you have a payment due. Ideally, you’ll build up to paying off all of the outstanding balance each month.

Only Charge Things You Can Afford

It’s easier to pay off your credit card balance when you use it on things you can actually afford. Remember your budget the next time you reach for plastic while you’re shopping. If it’s something you can’t afford, ask yourself if you need it right away.

Is it possible to put it off until you save a little cash to cover the expense? If the answer is yes, hold off on the purchase.

As for your line of credit, it shouldn’t keep you company while you shop. It’s better used a financial safety net in unexpected emergencies.

4. Closing Credit Cards and Lines of Credit

Now that you have some perspective on credit, you might realize your past decisions haven’t always contributed positive entries to your file. Perhaps you’ve overly relied on minimum payments when you could have paid off the whole balance. Or maybe, an unexpected medical issue caused you to miss bill payments and apply for multiple loans in a short period.

Once you’re ready to make an impact on your credit history, you might be tempted to close your accounts and start fresh. But you may want to reconsider this option.

For one thing, closing an account won’t erase a negative entry from your file. Both good and bad instances of credit hang around for much longer than your account may be open. Once a credit agency reports a missed payment, it’s in your history for the next seven years — regardless of the final status of your loan. For another thing, closing accounts affects the age of your credit. Length of history is one of the factors used when calculating your score.

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Older accounts tend to show more information about your payment history than younger ones. A scoring model like FICO will be able to create a more accurate estimate of your future borrowing habits when they have more information to base their calculations on.

Closing an account may also negatively impact your credit utilization if the account is revolving. Remember, this rate shows how much of your credit you use. If you close a revolving credit account with a large limit, you’ll lower your overall available limit. Even if you keep your usage the same in other accounts, what you charge on them will make the utilization ratio higher, since the overall credit now available to you is lower.

Focus on Contributing Positive Entries First

Rather than closing an account and hoping for the best, see what you need to do to start adding positive entries to your credit report. Eventually, these positive entries may outnumber the negative and make an impact on your overall credit history if your overall credit habits are good.

As always, keeping a low credit utilization and paying your bills on time are two credit-savvy habits. So, check in with your budget to see what expenses you can slash to reroute your money towards these goals.

However, it’s important to note a variety of factors may impact your history. Don’t neglect these other aspects as you focus on managing your payment history and credit utilization.

5. Not Checking Your Credit Report

Bringing an end to our tour of what hurts your credit score is failing to check in with your credit. Unfortunately, a lot of people are guilty of this bad habit. One survey shows 43 percent of Americans haven’t checked their score in the past year, while another shows 21 percent of adults have never checked it at all.  Many credit experts recommend taking advantage of your three free checks through AnnualCreditReport.com. If you time it right, you can peek at your report every four months, giving you regular coverage throughout the year.

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What Impacts Your Credit Score the Most?

In a perfect world, we’d have a single answer for you. But that’s not how credit works. It’s a dynamic score that’s the product of several different factors. Each factor plays off each other to create your score.

What we can tell you is the breakdown of each factor, so you know how big of a role each of these aspects play in FICO, the most popular scoring model used today.

  • Payment history: 35%
  • New Credit: 10%
  • Amounts Owed and Credit Utilization: 30%
  • Length of History: 15%
  • Credit Mix: 10%

While payment history and utilization make up the biggest parts of your score, they’re just two pieces of the pie. When combined, the other factors have as much of an impact, so it’s important you spend time with each one.

It may take more time and energy but having a holistic view of your credit may help you have the greatest impact on your history. How long it takes depends on your unique financial situation — from your starting score, your current habits, and your future goals and habits.

Whatever your starting point is, click here to learn more top tips on how to build up positive credit history. With each new commitment to these habits, you may add another positive entry in your file until one day, it may outweigh any negative entries you may have. You just need to take the first step and decide you want to make a change.

Are you ready? Good luck and let us know how you intend to make a positive change on your report!