Understanding your credit score

Your credit score is a big factor in determining your interest rate and whether you qualify for a loan. By better understanding the key factors that make up your credit score, you can feel more in control. 

What is a credit score? 

A credit score is a numerical representation of an individual's creditworthiness, based on their credit history. It typically ranges from 300 to 850, with higher scores indicating better credit reliability.   

Lenders use credit scores to assess the risk of lending money, with factors like payment history, credit utilization, and the length of credit history playing a key role in determining the score. A higher score can help you qualify for loans with better terms and interest rates. 

What is a FICO score?​

Many lenders use your​ FICO®​​Score​​​, or credit score, to determine whether to offer you credit. Your FICO score is calculated using a mathematical formula for your credit report data.^[1] “FICO” is an acronym for the Fair Isaac Corporation, the company that created the FICO ​​score.  Your FICO score may also be a big factor in determining your interest rate. Generally, lenders consider people with higher scores to be more desirable borrowers, as they typically have a lower risk of defaulting on their loans. 

What factors affect your credit score the most? 

When it comes to understanding your ​​credit ​score​, knowing the factors that influence it is crucial. Your credit score isn't just a random number—it's calculated based on specific financial decisions and patterns. These key factors help lenders determine how reliable you are as a borrower. In this section, we’ll break down the essential components that impact your credit score, so you can take steps to improve and maintain a strong credit profile.  

On-time payment history 

Your credit report shows your credit and loan balances and your track record for repaying them. Paying on time can help improve your credit score, while just one or two late payments can lower your score. Automatic bill pay or calendar reminders are easy ways to help you avoid late payments. 

Credit utilization rate 

Your credit card usage is represented as a percentage that’s equal to your total credit card balances divided by your total credit card limits. 
 
Example: 

• You have two credit cards with limits of $5,000 and $20,000. 

• The first credit card has a balance of $500, while the second credit card has a balance of $2,000. 

• The credit bureaus calculate your credit card usage: 
  ($500+$2,000) / ($5,000+$20,000) = 0.1, or 10%. 

Creditors may use this percentage to decide whether to approve or deny a loan or credit card. While low overall credit card usage can help your credit score, it’s important to note that a high balance on any one card may lower your score. You can help this by paying off high balances on cards with a lower credit limit first, or by requesting a credit limit increase from your credit card provider. Keep in mind that to raise your limit, some companies make a hard credit inquiry that may affect your credit score. 

Diversity of accounts 

The longer your credit history—and the older your accounts are—the better. That's why keeping older credit cards open and active can be a good idea as long as you are able to pay the full balance on time each month to avoid racking up interest.

Total accounts

People with more accounts or open lines of credit often have higher credit scores because it shows that lenders are willing to give them credit. Having a good mix of different types of credit helps your credit health as well. That said, it's definitely a balance, so only open accounts you really need. 

Hard inquiries 

When you apply for a credit card, mortgage, loan, or other credit, a hard credit inquiry appears on your credit report. One hard inquiry usually has little impact on your credit score, often a decrease of 1 to 5 points. Multiple inquiries can add up and have a larger impact. 

In contrast, a soft inquiry doesn't affect your credit score. Only you can see it on your credit report. Others, like lenders, can't see it. When you check your rate through LendingClub, we use a soft inquiry. We’ll only do a hard pull of your credit (which could affect your credit score) once your loan is approved. There's no need to worry if your loan application isn’t approved. ​​Being declined for a loan doesn't hurt your credit. 

Public records 

Public records, like judgments, tax liens, or bankruptcies, can appear on your credit report as negative items. These records typically stay on your credit report for seven years. Certain bankruptcy types might remain for 10 years. A negative public record indicates to a lender that you may have mismanaged your credit in the past. 

Paying off installment loans 

Installment loans include personal loans, auto loans, student loans, or any loan paid over a set period with a set schedule of payments. Unlike balances on credit cards or revolving lines of credit, an installment loan account closes once the debt is paid in full. While paying off an installment loan is great for your financial health, doing so won’t always increase your credit score—in some cases, your credit score may even temporarily drop. A few reasons for this are: 

• You paid off your only installment loan: Credit bureaus like to see a mix of different credit types. If you paid off your loan and your only other credit history comes from credit cards, this may lower your score. 

• You have a low number of total accounts: If you have a small number of accounts, closing one can impact your score. 

• The loan you paid off is one of your older accounts: If you pay off a long-term loan, like a student loan or mortgage, you lose the history that goes with those accounts when they drop off your credit report, which can reduce the average age of your accounts and may lower your score. 

It may be tempting to delay paying off your loan to avoid a possible drop in your score. Keep in mind, though, that making consistent payments on your loan and paying it off on time helps your credit in the long run. Closed accounts in good standing still appear on your credit report for up to 10 years. They no longer count toward credit age or your account mix, but a good payment history is a crucial part of your credit health. 

If your credit score drops because you have high balances on your credit cards, a balance transfer loan can be a great solution. Rates for balance transfer loans tend to be lower than other types of personal loans with LendingClub—and most credit cards—and have higher approval odds. When you pay off your credit card balances and add a personal loan to your credit mix, it may help raise your credit score. 

Credit score types​ ​​

Credit scores come in many different types. The score you see when you pull your report or get from a monitoring service may not match the score a financial institution uses to make a lending decision. ​​While 90% of top lenders consider your FICO score, a lender may base your rates on other popular credit-scoring models, VantageScore.​​

How to check your credit ​scores 

Many factors affect your credit scores, however your payment history and credit utilization make up nearly two-thirds of your scores. By paying close attention to your finance and money habits, you can work on improving your score over time. Checking your credit scores and credit reports regularly can help you keep tabs on your scores.

You can request a free copy of your credit reports from Equifax, Experian, and TransUnion once a year through AnnualCreditReport.com. 

1. FICO. "What's in my FICO^® Scores?"