Busting Credit Myths: Income and Your Credit Score

Factors That Affect Your Credit

There are five factors that affect your FICO^® Score^Θ. Here they are, along with the percentage of your score they make up:

• Payment history (35%): On-time payments help increase your credit score, but missed payments, foreclosure, repossession and bankruptcy can hurt your credit.

• Amounts owed (30%): Your score is impacted by how much you owe overall as well as your accounts' credit utilization, which is the percentage of your credit limit that you're using at a given time. The lower your credit utilization, the better effect it can have on your credit score.

• Length of credit history (15%): The longer you've been using credit, the more information lenders have to evaluate your debt management.

• Credit mix (10%): Being able to manage different types of credit well—such as a credit card, an auto loan and a mortgage loan—can help increase your credit score.

• New credit (10%): Every time you apply for credit, the resulting hard inquiry could temporarily decrease your credit score by a few points. Once approved, the appearance of a new account can also have an effect. Avoid applying for multiple credit accounts in a short period, and you shouldn't experience too much harm to your credit.

Factors That Don't Impact Your Credit Score

While your income is an important factor that lenders consider when you apply for credit—after all, they'll want to make sure that you can afford to make your monthly payments—it doesn't impact your credit score in any way.

Here are some other factors that don't affect your credit score:

• Employment status
• Job history
• History filing for unemployment benefits
• Race or ethnicity
• Religion
• Marital status

Focus on the Factors That Matter

As you work on building your credit, it's important to focus on the elements of your credit history that lenders care about.

For example, if you were to open a secured credit card, make it a goal to pay your bill on time every month, and preferably in full to avoid interest charges. Additionally, take care to avoid racking up too high of a balance.

Also, consider other ways to build credit, such as becoming an authorized user on a loved one's credit card account or applying for a credit-builder loan. As you pursue these and other options, understand how each influences the factors that go into your credit score and how you can maximize each opportunity to build your credit profile.