What Affects Credit Score

Payment history is the single biggest factor affecting credit score, accounting for around 35% of the total score, with a single missed payment decreasing the score by up to 100 points, as seen in the case of a borrower with a 750 credit score who missed a $2,000 mortgage payment and subsequently saw their score drop to 650.

Main Factors

• Payment history — the mechanism is the recording of on-time or late payments, the direction is that late payments decrease the score, and a concrete example is a borrower with a 750 credit score who missed a $2,000 mortgage payment and saw their score drop to 650, a 100-point decrease, with the magnitude of the decrease depending on the severity of the late payment, such as a 30-day late payment decreasing the score by 60-80 points, while a 90-day late payment decreases it by 100-120 points.
• Credit utilization — the mechanism is the ratio of debt to available credit, the direction is that high utilization decreases the score, and a concrete example is a borrower with a $10,000 credit limit and a $3,000 balance, resulting in a 30% utilization rate, which is considered manageable, but increasing the balance to $9,000 would increase the utilization rate to 90%, which would decrease the credit score by around 50-70 points, with the magnitude of the decrease depending on the individual's overall credit profile, such as a borrower with a long credit history and multiple accounts, who may be less affected by high credit utilization.
• Credit age — the mechanism is the length of time the borrower has had credit, the direction is that older credit increases the score, and a concrete example is a borrower who has had a credit account for 10 years, resulting in a 50-point increase in their credit score, with the magnitude of the increase depending on the overall length of the credit history, such as a borrower with a 20-year credit history, who may see a 100-point increase in their score.
• Credit mix — the mechanism is the variety of credit types, the direction is that a diverse mix increases the score, and a concrete example is a borrower with a mortgage, credit card, and car loan, resulting in a 20-30 point increase in their credit score, with the magnitude of the increase depending on the specific types of credit and the borrower's overall credit profile, such as a borrower with a high credit utilization rate, who may not benefit as much from a diverse credit mix.
• New credit — the mechanism is the opening of new credit accounts, the direction is that excessive new credit decreases the score, and a concrete example is a borrower who opens 5 new credit cards in a single year, resulting in a 50-70 point decrease in their credit score, with the magnitude of the decrease depending on the number of new accounts and the borrower's overall credit profile, such as a borrower with a short credit history, who may be more affected by new credit inquiries.
• Credit inquiries — the mechanism is the number of times the borrower's credit report is accessed, the direction is that excessive inquiries decrease the score, and a concrete example is a borrower who has 10 credit inquiries in a single year, resulting in a 20-30 point decrease in their credit score, with the magnitude of the decrease depending on the number of inquiries and the borrower's overall credit profile, such as a borrower with a long credit history, who may be less affected by credit inquiries.
• Public records — the mechanism is the presence of negative public records, such as bankruptcies or foreclosures, the direction is that these records decrease the score, and a concrete example is a borrower who filed for bankruptcy, resulting in a 100-150 point decrease in their credit score, with the magnitude of the decrease depending on the type and severity of the public record, such as a borrower with a foreclosure, who may see a 150-200 point decrease in their score.

How They Interact

The interaction between credit utilization and credit age can amplify the effect of high credit utilization on a borrower's credit score, as seen in the case of a borrower with a $10,000 credit limit and a $9,000 balance, who also has a short credit history, resulting in a 100-point decrease in their credit score, whereas a borrower with a long credit history may only see a 50-point decrease. The interaction between new credit and credit inquiries can also amplify the effect of excessive new credit on a borrower's credit score, as seen in the case of a borrower who opens 5 new credit cards in a single year and also has 10 credit inquiries, resulting in a 100-point decrease in their credit score. The interaction between payment history and public records can cancel each other out, as seen in the case of a borrower who has a foreclosure on their credit report but has also made all their payments on time for the past 5 years, resulting in a 50-point increase in their credit score.

Controllable vs Uncontrollable

The controllable factors are payment history, credit utilization, credit mix, new credit, and credit inquiries, which are controlled by the borrower through their financial decisions, such as making on-time payments, keeping credit utilization low, and avoiding excessive new credit. The uncontrollable factors are credit age and public records, which are outside the borrower's control, as credit age is determined by the length of time the borrower has had credit, and public records are determined by external events, such as a foreclosure or bankruptcy.