Your credit
score is one of the most influential components when it comes to being approved
for loans and credit cards, and it is determined by a number of different
factors. This includes your history of on-time payments and how much debt you
owe as well as what types of credit you have and how long your credit history
is.

Knowing what affects your credit score is the first step to
ensuring your score stays high so you can qualify for financing opportunities
when they arise. We’ll address all your questions about what affects your
credit score, as well as how to keep track of it.

Related: What Is a credit spread? Explained and defined

Why a Good Credit Score Is Important

In a nutshell, having a good credit score provides opportunities
for you financially and can help you spend less overall on financing. If you want
to buy a car, a good credit score can help you find a loan at a low rate.
Similarly, having good credit is key to opening a credit card.

Having a bad credit score — generally anything under 500 on the scale of poor to exceptional credit —
can limit your financial opportunities. If you have bad credit, you may not
qualify for loans that you apply for, or if you do, you may have higher
interest rates. You also may not get approved for a credit card, unless it’s a
secured card, which requires a deposit and has a low credit limit. A bad credit
score could even hamper your job search, particularly if the job involves
handling money.

The bottom line is that having bad credit hinders your ability
to grow financially, so it’s important to do what you can to maintain a good
credit score.

5 Factors That Influence Your Credit Score

The first step toward building your credit score is
understanding what factors help to determine it. In general, these are the five
credit score factors that shape your score:

Factor
#1: Credit Utilization

When it comes to what affects your credit score, one of the most
important factors is how much credit you have available versus how much debt
you currently have. Called your credit utilization, you can calculate this
number by dividing your outstanding debts by your total credit available.

Let’s say you have three credit cards with a total credit limit
of $30,000. You owe $3,000 in total. So, your credit utilization would be:

3,000/30,000=0.10

Your credit utilization of 10% (you’re using 10% of your total
available credit) is great, as lenders generally want to see a utilization rate
below 30% to approve a loan application.

Factor
#2: Payment History

You might not feel like an occasional late payment on a credit
card is a big deal, but it can impact your credit score negatively. In fact,
payment history accounts for 35% of your FICO score (the scoring system for
the credit bureau Experian).

The easiest way to raise your credit score? Pay your bills on
time. Many loans and credit cards will allow you to set up autopay, which is a fool
proof way to make sure you never miss a payment.

Factor
#3: Credit History Length

You’re not born with a credit history; it has to be built over
time. Many college students start the journey by opening their first credit
card account. This is a great place to start, though remember that good habits
like paying on time and keeping your credit utilization rate down will help
build good credit.

And lest you think if you want a new credit card you need to
close an old one, you don’t. The longer you have relationships with credit
companies, the better your credit.

Factor
#4: Types of Credit

While this factor isn’t nearly as important as the others, the
types of credit you have can impact your credit score. Having a nice mix of
credit — such as credit cards, a home mortgage, and an auto loan — can
contribute positively to your credit scores, though it isn’t required.

Factor
#5: Recent Applications

Whenever you apply for credit, whether that’s a car loan or a
credit card, there is what’s called a “hard inquiry” on your credit report. If
you make several applications within a few days or weeks of one another, it may
be seen as derogatory on your report, and your credit score might dip a bit.

Consider your credit needs carefully and try to look for lenders
that let you see if you prequalify, since that is considered a “soft inquiry”
and won’t impact your credit the same way.

Remember, There Are 3 Main Credit Scores to Consider

While the factors above are what generally affect your credit
score, you actually have three different credit scores, each of which
may be calculated slightly differently. These three credit scores come from the
following three personal credit bureaus that track your financial activity:

•   TransUnion

•   Experian

•   Equifax

Each bureau has its own credit scoring system that it uses to
determine your score. Some loans and credit card companies report to one or two
bureaus — or even all three — so it’s important to know that your activity may
show up slightly differently depending on the reporting agency.

How to Track Your Credit Score

Now that you understand what affects your credit score, it’s
your responsibility to stay on top of your score so you know when it changes.
Each credit scoring bureau updates scores on a different schedule, but you can
expect updates roughly every 30 to 45 days.

There are several places you can check your credit score. Some
banks and credit card issuers offer the service free to customers.
Additionally, you are entitled to one free credit report a year from AnnualCreditReport.com, which
provides your credit reports and scores from each of the three credit bureaus.

Tracking your score is important even if you don’t plan to take
out a loan or open a credit card any time soon. Make sure to regularly review
your report to ensure there are no discrepancies, such as a late payment you
know you didn’t make, or an open account you closed. If you see anything that
is incorrect, contact the credit bureau immediately to get it resolved.

The Takeaway

Once you understand what affects your credit score, you have the
power to improve your score by taking steps such as reducing your credit
utilization and paying your bills on time. As you build your credit, you will
qualify for better loan offers and interest rates on credit cards, which can
empower you to purchase what you need without high expense.

Learn more:

• 8 reasons why good credit is so important
• Invoice financing vs Invoice factoring

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score based on TransUnion™ (the “Processing Agent”) data.

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