Your credit profile and scores are one of the most important qualifying factors when you apply for a loan. If your scores are low, you can expect to pay a higher interest rate than somebody who has a high credit score. If your scores are low enough, you may not qualify at all. If you plan to take out a mortgage, auto loan, or personal loan, it’s important that your credit scores are as strong as possible.
What Determines Your Credit Scores
Credit scores range from a low of 350 to a high of 850. According to Credit.com, the average credit score in the United States was 711 in 2021. There are five main factors that influence your credit scores:
- Payment history: 35%. Making your payments on time is one of the most important factors that determine your credit scores. Payment history is also commonly evaluated as a separate lending criteria for many types of loans (for example, mortgages).
- Credit utilization: 30%. If you have high utilization (i.e., you’re “maxed out”) on your credit cards, expect your credit scores to take a hit even if you make your payments on time. Ideally, you want to keep your utilization on credit cards below 30% of the credit limit. This is important even if you pay off your credit cards in full every month.
- Credit age: 15%. Length of credit history contributes to good credit scores. Avoid closing old accounts unless absolutely necessary.
- Credit mix: 10%. Lenders like to see a mix of different types of credit accounts, such as revolving (credit card) accounts and installment loans like mortgages, car loans, etc.
- New credit: 10%. Be careful when applying for new credit cards or loans. Too many new accounts can damage your credit scores.
How Can I Improve My Credit Scores?
If you want to improve your credit scores, the most important thing is to make your payments on time. Payment history is the single largest credit scoring factor.
You’ll also want to avoid overutilizing your revolving credit. A high utilization can severely damage your credit scores even if you make your payments on time.
If you’d like to close a few accounts, be sure to leave older accounts open. Length of credit history contributes to good credit scores.
Be careful not to open too many new credit accounts at one time. If you’re shopping aggressively for new loans, your scores may take a hit.
Do Credit Inquiries Damage Credit Scores?
It’s important to be careful with credit inquiries, but you don’t need to be paranoid about them. It’s not a problem if you incur a few credit inquiries as you shop for the best deal on a loan. If the inquiries are for the same type of loan and they occur in a short time frame, they’re treated as one inquiry by the credit bureaus for credit scoring purposes.
Credit inquiries usually only damage your scores if you incur many of them in a short time window. You don’t want to look like you’re desperately shopping for a loan by having a lot of lenders run your credit (car dealers are notorious for this). If you do, your credit score will likely suffer.
Credit inquiries are not usually a problem as long as you don’t have an excessive number of them.
Common Credit Scores
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