Personal Finance

What Affects Your Credit Score?

Name: Information on the effects that credit scores can have on home loan applications
Brand: Axos Bank

Sep 05, 2023

Watching our parents swipe a piece of plastic at a store was mystifying when we were kids. But as adults, do we still find credit mysterious? According to a LendingTree Survey, it appears many do – 37% of respondents said they have no idea how their credit score is determined.

Your credit score can affect many parts of your life including where you live and financing options for the car you drive. But do you know how your life choices affect your credit score?

The first step to understanding what impacts a credit score is knowing your score. Enroll in free Credit Score Monitoring to receive your updated score every two weeks.

Credit Score Factors: The Basics

You’ve learned a few things since you were young, and most people recognize some factors that can have a high, medium, and low impact on your score.

There are hundreds of credit score calculating algorithms, and some factors may be weighted differently within them. Below are some major factors that most credit score calculations use. For more common factors, read our article on Home Loan Basics Credit Considerations.

1. High Impact

Payment History – This is the record of how you’ve paid your loans and credit cards. You can ensure your payment history is squeaky clean by being aware of when your bills are due and paying them on time. Create a failsafe by using automatic payments. For example, Axos Bank offers Bill Pay for automatic payments.

2. Medium Impact

Credit Usage – This is the ratio of credit you're using compared to the credit you have available. For example, your credit card limit may be $2,000, but you might only spend $20. If this is your only credit account, then your usage is 1% ($20 / $2,000).

Ideally, you want the lowest possible credit usage percentage you can manage. A common threshold for usage is under 30% according to Experian. You can keep your usage low by making credit card payments throughout the month and paying off the balance in full on the due date.
Credit Type and Length – This is the mix of different credit account types you have and how long you've had them. People with high credit scores typically have a long history of credit distributed over a healthy mix of account types.

To improve this factor takes time and planning. Think of how you can create a reputable mix and length of credit every time you open an account or take out a loan. Start with credit as soon as possible and begin a history of reliably paying back debts over time.

3. Low Impact

Available Credit – This refers to how much credit you have left to use. This is like credit usage, but instead of a percentage, it's simply the amount of credit you have in use subtracted from your total credit limit.
For example, if your only credit account is a credit card with a limit of $2,000, and you’ve only spent $20 on it, your available credit is $1,980 ($2,000-$20).

Unusual Credit Score Factors

Besides the more common factors, there may be some surprising habits affecting your score.

Credit Diversity

Credit diversity refers to how many different types of credit accounts you have. For example, someone who has a total of $20,000 of debt split between a personal loan, student loans, a car loan, and a mortgage has more credit diversity than someone with $20,000 of debt only in student loans.

Because credit diversity impacts your score, it’s important to be mindful when you close credit card accounts. That may hurt your credit instead of helping it.

Applying for More Credit

You might think a great way to improve credit usage percentage is increasing your available credit by opening another account. However, this strategy may work against you.

Every time you open a new credit account, it leads to a hard inquiry on your credit report. This signal may worry potential lenders about the extra debt you’re taking on. You may want to think of other strategies to lower usage percentage.

Closing an Unused Credit Card

Closing an unused credit card can negatively impact your credit score in two ways. The first is that closing a credit card lowers your available credit and will increase your credit usage percentage. The second is that it may reduce your credit diversity.

Be sure to keep these impacts in mind when you decide to close unused credit accounts to minimize the impact on your credit.

Unpaid Parking Tickets, Library Fines, Unpaid Tolls, Forgotten Gym Memberships

Having derogatory marks, or a history of unpaid debts, has a significant negative impact on your credit score. But these marks may not always come from places you expect.

While an unpaid parking ticket or library fine may not seem important, they may lead to negative marks on your credit report. Don’t let unpaid tolls, forgotten gym memberships, or other miscellaneous payments become overdue and hurt your credit.

Use a tool like Personal Finance Manager to stay on top of your expenses – it’s free in the Axos mobile app.

Avoiding Credit

For many reasons, some people choose to avoid credit altogether and never open credit accounts. This isn’t a bad thing in itself. However, by avoiding credit, you won’t accumulate a credit score. That’s because you have no history from which to build a score.

If you think there's a chance that you’ll need a loan in the future – perhaps to buy a home – then it’s a good idea to start building a responsible credit history.

Your Credit Future

There are lots of factors playing into your credit score, some of which may have never occurred to you. Because credit is affected by many factors, it’s important to stay on top of your credit score and have a holistic view of your finances.

It’s easy with the Axos app. Even if you don’t have an Axos account, credit score monitoring and financial planning tools are completely free in the app.