What Is a Credit Score and What Impacts It?

Your credit score can play a large role in achieving your financial goals.

A recent WSFS Bank study of 2,005 Americans between ages 18-40 found 65% of respondents agreed they understood what types of behavior impact their credit scores. But, understanding what exactly your credit score is and what impacts it can have gets confusing at times, and it never hurts to have a refresher.

A credit score helps businesses determine whether to lend you money, under what terms and if you’re likely to be able to pay them back. It can impact the interest rates you’re offered on loans for a house or car, insurance policy terms, employment applications and more.

While there are different scoring systems out there, here are some common things that impact your credit score.

Payment History

Your payment history is the largest factor in your credit score, so you’ll want to ensure you stay current on all bills. Adverse information can stay on your credit report for years and bring down your score, especially having a bill sent to a collections agency or filing for bankruptcy.

Amount of Credit Utilized

Another major factor in determining your score is your credit utilization. This factors in your debt to credit ratio, and you’ll want to ensure you aren’t maxed out on any lines of credit.

It may seem counterintuitive, but you also do not want to close your unused credit cards. Closing the old card will decrease your credit limit and impact your ratio. Try using those cards for a small purchase every few months to keep the account open – just ensure you remember to pay them off.

Length of Credit History

Credit scores factor in the age of your accounts, including the oldest account and average age of your various lines of credit. This is another reason not to close your rarely or unused credit cards – unless they come with a high fee.

Credit Mix

Your credit mix, or different types of credit you have, also factors into your score. Having a good mix of installment credit, like car loans and mortgages, as well as revolving credit, such as credit cards, can lead to a better score.

New Lines of Credit

Applying for new lines of credit will typically bring your score down a bit. While it isn’t a bad thing to get new lines of credit when needed, you’ll want to avoid opening too many accounts in a short period of time, as this could negatively impact your score.

Your credit score varies based on the system used to calculate it, but generally a score just under 700 and above is considered good, with a score above 800 putting you in the top classification.

Many credit cards provide your credit score on monthly statements or allow you to check it in their mobile app without a negative impact, with some even providing tips on what might be dragging your score down to help make adjustments.

As a result of the pandemic, Equifax, Experian and TransUnion are providing consumers a free weekly credit report until April 20, 2022. While these free reports don’t provide your credit score, they can give you a good look at what is impacting your score as well as help you check for inaccuracies and fraud.

It is important to always live within your means, use your credit cards responsibly and only take out loans you’re confident you can pay back. With proper budgeting and financial discipline, you’ll be able to manage your money effectively and build your credit score to get solid rates for things like the mortgage for your dream home.