Which factors impact your credit score the most?

Posted by Caitlin on December 14th, 2009

The following post in our Reader Question series is an actual user submitted question.

Q: When looking at your credit report, is there a way of prioritizing which areas to work on? E.g., if you have credit card debt, are working on paying an offer and compromise with the government, is there a reference to how much your credit score will change upon making payments or finalizing agreements? By that I mean is there a scale of values that a reporting agency like Equifax would use to grade your adjustments? If so, how does one find the "rulebook," so to speak?

A: There are several different algorithms used to calculate credit scores, and those formulas are rarely if ever made available to the public. The most commonly used score is the FICO score, and the exact method for calculating this score is closely guarded by the Fair Isaac Corporation. However, we do have a rough idea of how the various items in your credit report are prioritized by FICO and similar credit score formulas.

35% of your score is based on payment history. Late payments, bills that have been sent out for collection, and bankruptcies will have the most significant impact on your score. Negative items that occurred recently are the worst for your score.

30% of your score is based on the amount of debt you owe in proportion to your available credit. If you have unpaid loans or carry high balances on credit cards, this will lower your score. Credit cards with high limits and low balances will improve your score.

15% of your score is based on the length of your credit history. The longer you've had some form of credit, the higher your score will be. This means that canceling your oldest credit cards will hurt your score.

10% of your score is based on new credit and hard inquiries of your credit report. If you recently opened many new credit accounts, this will temporarily lower your score. However, multiple hard inquiries within a short period of time will be counted as one, so you won't be penalized for shopping around for a loan.

10% of your score is based on the diversity of your credit. If you have multiple types of credit, such as credit cards and loans, this will improve your score.

The importance of any one particular factor will vary depending on your overall credit history. Some credit monitoring services, including Equifax Credit Watch Gold 3-in-1 Monitoring Plus Score Power and myFICO Score Watch, provide score simulators that predict how your score would change if you took certain actions, such as paying off certain loans or cancelling a credit card. These services also include a full explanation of the factors affecting your credit score.

To learn more about Equifax Credit Watch Gold 3-in-1 Monitoring Plus Score Power, myFICO Score Watch, and other credit monitoring services, see our reviews and comparison chart. You may also find our FAQ helpful.