Not really – payment history and how much you owe have a much larger impact on your credit score.
Credit scores are numerical values that reflect your creditworthiness, or how likely you are to repay your debts on time. Different companies may use different methods to calculate your credit score, but one of the most common ones is the FICO score, which ranges from 300 to 850. The higher your score, the better your chances of getting approved for loans, credit cards, and other forms of credit.
The FICO score is based on five main factors, each with a different weight in the calculation
- Payment history (35%): This factor shows how well you have paid your credit accounts in the past. It includes information on late or missed payments, bankruptcies, collections, and delinquencies. The more payment issues you have, the lower your score will be.
- Amounts owed (30%): This factor shows how much debt you have compared to your available credit. It is also known as your credit utilization ratio, which is the percentage of your credit limit that you are using. For example, if you have a credit card with a $1,000 limit and a $500 balance, your credit utilization ratio is 50%. The lower your ratio, the better your score will be, as it indicates that you are not overextending yourself with debt.
- Length of credit history (15%): This factor shows how long you have been using credit. It considers the age of your oldest and newest accounts, as well as the average age of all your accounts. The longer your credit history, the better your score will be, as it shows that you have a lot of experience with managing credit.
- New credit (10%): This factor shows how often you apply for new credit or open new accounts. It includes information on hard inquiries, which are requests by lenders to check your credit report when you apply for credit. Too many hard inquiries in a short period of time can lower your score, as it suggests that you are desperate for credit or taking on too much debt.
- Credit mix (10%): This factor shows the diversity of your credit portfolio. It considers the number and types of credit accounts you have, such as credit cards, installment loans, auto loans, mortgages, etc. Having a good mix of different types of credit can improve your score, as it shows that you can handle various forms of credit.
These factors are not the only ones that affect your credit score, as different scoring models may use different criteria and weights. However, they are the most common and important ones that you should pay attention to if you want to improve your credit score. You can check your credit score and credit report for free from various sources, such as your bank, credit card issuer, or online service. By monitoring your credit regularly, you can identify and correct any errors, track your progress, and take steps to boost your score.
