3 Things that Impact Your Credit Score and How to Avoid Bad Credit

March 5, 2021

Your credit score is the key to financial flexibility. It’s often used when you buy a house, get a car loan, open bank accounts, and do just about anything that requires a third party to have financial confidence in you.

But what goes into your credit score? How do you go about avoiding bad credit? Let’s look at the three most important things that impact your credit score and what you can do with each to help improve your score as high as possible.

Your Payment History

According to the Fair Isaac Corporation (FICO), the company responsible for the credit score used by 90% of the top lenders, your payment history makes up the largest chunk of your credit score (35%). Whether or not you make your payments on time is a massive indicator of how financially reliable you are, which is why it’s so impactful to your credit score.

Does it really matter if you miss a few payments? Yes. In fact, one late payment can stay on your credit report for up to seven years. It’s imperative that you make all your payments on time to maximize your credit score, not just most of them.

The Amount of Money You Owe

The second most important thing that can impact your credit score is the amount you owe (30%). Remember, a credit score is a numerical number that attempts to represent how likely you are to default on a loan. Who is riskier to a lender—someone who has a little outstanding debt or someone who owes a lot of money to a lot of people?

If you’re looking to avoid bad credit, you have to do everything in your power to demonstrate a lower risk to lenders. One of the best ways to do this is by making a plan to pay down your existing debt.

The Length of Your Credit History

The third biggest factor that goes into your personal credit score is the length of your credit history (15%). In simplest terms, it’s how long you’ve been doing things that demonstrate good or bad borrowing habits. If you just started utilizing and building credit, you’re going to have a shorter credit history. But if you’ve been borrowing and paying back money successfully for a long time, the longer credit history makes you more reliable on paper to lenders.
Don’t feel bad if you’re just starting out building your credit history. If you keep doing the right things over and over again, your credit history length will grow and your score will go up.

Putting The Rest Together – How to Avoid Bad Credit

Today, we looked at the three biggest factors that impact your credit score. There are more though. Things like your credit mix, new credit inquiries, bankruptcies, and any other past financial history all go into making up your score.

Ultimately, here’s the best advice to avoid bad credit and build good credit. In all your financial actions, work to demonstrate that you are a trustworthy borrower. Always live up to your obligations, make your payments on time, and don’t get overextended. If you do these simple things repeatedly, you’ll be a credit score rock star in no time. If you want to learn more concrete examples of how to build your credit score, check out our article 3 Tips to Improve Your Credit Score.

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