What Are the Two Most Important Factors in Calculating Your Credit Score?

Your credit score plays a vital role in your financial life, influencing everything from loan approvals to interest rates and even rental housing decisions. With so much depending on those three digits, it’s crucial to understand what goes into calculating your score. In this article we uncover What Are the Two Most Important Factors in Calculating Your Credit Score?

Of the many elements impacting credit scores, two stand out above the rest: payment history and credit utilization. Together, these two key factors make up the majority of your overall score. By mastering credit utilization strategies and building a positive payment history, you can optimize your creditworthiness even if other factors are less ideal.

In this comprehensive guide, we will explore why payment trends and usage rates matter so much in credit decisions. You’ll learn insider tips to managing these two areas of your profile, while also briefly covering the other influential score ingredients. Follow these best practices and watch your credit transform.

An Introduction to Credit Scores and Creditworthiness

Before diving into the top two defining credit score factors, let’s quickly recap what these influential numbers mean in the first place.

What is a Credit Score?

Your credit score is a number ranging from 300 to 850 that indicates your creditworthiness and likelihood to repay debts. The most popular credit scoring model is published by FICO and used in the majority of lending decisions.

Credit scores provide a mathematical snapshot of your responsible financial behaviors over time. Good credit means you handle loans, credit cards, and other accounts reliably. Bad credit sends up red flags you may struggle with repayment.

Scores derive from information on your credit reports at the three major consumer reporting bureaus — Equifax, Experian, and TransUnion. The factors assessed from your reports to compute your score include:

• Payment history
• Credit utilization
• Age and mix of credit
• Pursuit of new credit
• Credit inquiries

We’ll overview how each area impacts your credit later on. First, let’s look at why scores matter to begin with.

Why Your Credit Score Matters

Your credit score serves as a grade for lenders to evaluate if you qualify for new credit and what terms you will receive.

The higher your credit score, the better off you are:

• Easier loan approvals
• Lower interest rates saving money
• Increased credit limits
• Security deposits waived
• Access to premium credit card rewards

On the flip side, poor credit scores translate to more frustrating outcomes:

• Loan denials
• Sky-high interest costs
• Lower borrowing power
• Required cash deposits
• Missed opportunities

For major expenses like homes, cars, and education — not to mention daily conveniences like utilities and cell phone plans — good credit plays a pivotal role.

Monitoring your credit score regularly allows you to catch issues early and intervene before lasting damage. Free resources like Credit Karma’s credit score tracker make this easy.

Now let’s review why payment history and utilization rise above all other factors.

Payment History: The #1 Factor in Credit Scores

Accounting for 35% of your total credit score, payment history carries the most weight by a wide margin. This portion of your score reflects whether you pay your bills on time each month.

Every account on your credit reports gets monitored for on-time payments or late transfers including:

• Mortgages
• Auto loans
• Credit cards
• Retail accounts
• Personal loans
• Utilities
• Cell phone plans

Positive payment history builds higher scores and shows lenders you handle debts responsibly. Missing payments can sink your credit rapidly with long-lasting consequences.

In short — pay all bills on time, every time, no exceptions.

Why Payment History Matters Most

Payment trends matter most in credit decisions because they offer real evidence of how you handle different types of debts. One missed payment can happen to anyone occasionally. But a pattern of late payments signals struggles to budget for recurring costs.

Lenders view recent missed payments especially unfavorably since they indicate current financial troubles. Even a single default 30, 60 or 90 days late can devastate a good score.

On-time payments over many months or years, however, prove consistent reliability managing loans. That’s why long positive history has an incredibly positive impact.

Good Payment History Increases Credit Scores

When every account shows up as “paid on time” in your reports month after month and year after year, you demonstrate meticulous bill management. FICO specifically factors in:

• Payment history length — Longtrack records of reliable payments boost scores more than brief positive histories.
• Payment consistency — Zero missed payments helps most. But if you slip up, getting back on track quick minimizes damage.
• Payment recency — Paying on time for the last 12 months improves current scores best.

Together, these give lenders confidence you handle debts properly over both short and long runs.

Missing Payments Tanks Credit Scores

Compared to the slow and steady score building from paying on time, missing payments causes rapid score declines. How badly and how fast depends on how long bills remain unpaid:

• 30 days late — Considered an initial payment default. Penalizes score significantly.
• 60 days late — Regarded as a serious delinquency. Hurts score more with each additional month.
• 90-180 days late — Deemed a major derogatory showing unwillingness versus inability to pay. Tanks scores 100+ points easily.

At this stage accounts typically get sent to collections agencies who pursue payments aggressively. This also demolishes credit – especially if debts ultimately get written off.

Late payments stay on credit reports for seven years with lessening impacts over time. Still, even a single default can sabotage an otherwise positive history quickly.

Strategies for Optimizing Payment History

Carefully managing accounts to never miss due dates is by far the best thing you can do for your score. With effort and organization, it’s possible to achieve 100% on-time history.

Tips to build your best payment track record include:

• Automate payments for as many bills as possible so you never forget.
• Review due dates for other monthly expenses without auto-pay to calendar reminders.
• Consolidate dates with manual bills to simplify managing payments.
• Set payment alerts via free tracker tools for extra reminders.
• Pay down balances to lower minimum payments and ensure sufficient funds monthly.

No matter how pressed you feel, do everything possible avoiding late fees or reporting defaults. Speak with creditors immediately if struggling to make ends meet. Many allow online deferments, revised due dates, or reduced minimum payments if you ask ahead of missing payments.

Strong payment history alone boosts credit scores tremendously even if other factors prove challenging. Now let’s review the second-most influential area – credit usage rates.

Credit Utilization: What Percentages Matter Most

After payment trends, credit utilization proves the next most decisive scoring factor accounting for 30% of your total credit score.

Utilization measures the ratio between credit limits extended to you versus how much of that available balance you use monthly.

Specifically, it divides your monthly revolving credit card balances by total credit access then expresses that ratio in percentages.

For example:

• Total Credit Card Limits: $10,000
• Total Balances Charged Monthly: $3,000

$3,000/$10,000 = 0.3

0.3 x 100 = 30% Utilization

This means you use 30% of total available card limits monthly.

The lower your utilization ratio, the better for credit scores. Why does this metric matter so significantly next to actual payment patterns?

Why Credit Utilization Impacts Scores

Utilization rates help indicate borrowing versus repayment abilities similar to payment history. Carrying over large balances monthly signals living beyond means dependent on credit to stay afloat.

In contrast, keeping usage low relative to access shows restraint only borrowing what you actually have cash to repay already. This aligns better with lender goals keeping clients creditworthy long-term.

Unlike payment history though, utilization carries no long-term memory in scoring models. Whatever your balances this month entirely dictate this portion of your score.

You can tank utilization one month then totally restore it the next by simply lowering balances before reporting dates. No prior rates get counted.

This introduces optimization strategies covered later to leverage short-term impacts for score gains when needed quickly. First though, let’s review recommendations.

Good Utilization for Credit Scores

Ideally keep overall utilization below 30% month-to-month especially when applying for new credit or loans.

The best utilization for credit scores actually falls between 1% and 10% though. Given no long-term memory, aim as low as you comfortably can through the month leading up to any new credit decisions for maximum points.

Specific account utilization matters too. Keeping any one card under 30% appears better than maxing a single limit.

For optimized usage:

• Overall utilization — 1-10% ideal; <30% recommended
• Per-card utilization — Always <30%; lower is better

With multiple cards, distribute charges strategically to stay under 30% on all of them. Again, no history gets recorded so no need to stress about occasional months exceeding limits unless doing so right before a credit application.

Poor Utilization Hurts Scores

On the flip side, carrying chronically high balances closer to your ceilings or consistently maxing cards signals risk. The higher your utilization, the more points you lose:

• 30-50% utilization — Significant score declines
• 50-75% range — Hurts even more the higher you carry
• 85%+ maxed out — Tanks scores drastically

Not only does high utilization itself lower scores, but it may incentivize risky financial behaviors too like:

• Paying only minimums
• Juggling debts between cards
• Late payments when cash low
• Depending on advances to pay bills

All these reflect badly through other score factors too though utilization itself bares the brunt of balance impacts.

Strategies to Optimize Utilization

Since no history applies, monitored card activity 30-45 days before reporting dates dictates this section of scores in the short run. Here are tips to leverage this quick-changing metric when needed:

• Make extra payments before applying for credit to lower reported balances.
• Consolidate charges onto one card and pay down others below 10%.
• Request credit line increases temporarily to lower utilization ratios.
• Ask lenders to report your lowest balance if possible instead of statement balance.
• Keep new charges low the 1-2 months before seeking new financing.

Your 30-45 day optimization window before applications is key here since no prior rates get counted. As long as you have cash to repay debts, leverage this short term flexibility to your advantage.

Alongside positive payment history, keeping utilization in check helps credit enormously in the short and long runs.

Other Factors Impacting Credit Scores

While payment trends and usage rates make up the bulk of credit scores, a few other aspects contribute 10-15% combined as well. These include:

• Age and type of credit accounts
• Frequency of new credit applications
• Hard credit inquiries

Let’s briefly summarize why each matters plus healthy strategies to know.

Age and Mix of Credit Accounts

The longer positive history you build across different accounts like revolving cards, installment loans, mortgages, the better for your score. Having both old and newly opened accounts also helps by demonstrating longevity plus reliability managing fresh credit.

Ideally keep long-running accounts open while also taking on new healthy credit over time like low-rate auto loans or cash back cards. Manage all accounts consistently without late payments.

This mix of account history length and diversity subtly boosts scores for stability.

New Credit Applications

Applying for too much fresh credit at once raises risks signaling financial struggles despite positive history. Every application also temporarily dings scores a few points.

Keep hard inquiries to under 2-3 per year ideally spaced apart if opening new accounts like cards or loans. Too many at once flags as potential score manipulation. Check AnnualCreditReport.com to verify your credit reports list all your legitimate applications but no errors.

Hard Credit Inquiries

Speaking of credit checks, every application you initiate for loans or cards authorized hard inquiry dings several points initially. But these fade within 1-2 years and get offset long run if you keep handling new accounts reliably.

Avoid unnecessary credit applications when possible, but know essential financing won’t sabotage your score forever if managed well after approval. Check reports annually for errors though listing accounts never opened.

Outside reasonable financing needs, limit hard check decreases from too many applications within a couple years.

Key Takeaways for Credit Score Success

Optimizing your credit boils down to mastering payment history behaviors and credit utilization strategies above all else. Keep these core lessons in mind:

• Payment history matters most at 35%. Never miss due dates across all accounts.
• Utilization is second most critical at 30%. Keep overall and individual usage rates low.
• Build longevity with consistent, on-time payments across your credit mix.
• Only open new credit sparingly every few years as needed.
• Monitor reports annually checking for errors to dispute.

By taking the right steps day-to-day to manage payments and usage wisely, your score will reflect your hard work over time. Credit is not built overnight but through years of small, smart money moves.

Continually Monitoring Your Credit Health

Check your credit reports and FICO credit scores every 4-6 months free through AnnualCreditReport.com and apps like Credit Karma to catch issues early.

Sign up for credit monitoring alerts as well if possible to get notified anytime reporting agencies add negative information that can impact your score. The sooner you address problems, the less scoring damage typically occurs.

Use the 6-month lookbacks to course correct utilization before applications or to contest any discrepancies found. Credit limit increase requests take this timing into account too.

With active monitoring and the fundamentals of positive payment history plus low utilization as your pillars, you can take charge of your credit score long-term. No quick fix gimmicks required!

Citing the Research in This Article

This article tapped the following external resources while providing education around credit scores:

https://www.myfico.com/credit-education/whats-in-your-credit-score

https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/

https://www.citi.com/credit-cards/credit-score-information/

https://www.creditkarma.com/credit-cards/i/average-credit-card-debt-statistics/

https://www.nerdwallet.com/article/finance/payment-history-helps-credit-scores

https://www.ficoscore.com/latinos/en/fico-scores/factors

https://www.experian.com/blogs/ask-experian/whats-the-best-credit-utilization-ratio/

https://www.experian.com/blogs/ask-experian/what-is-a-good-credit-utilization-ratio/#s4