Your credit score represents your creditworthiness. Banks and lenders will check your credit records to know if you are capable and responsible enough to be trusted with their money.
A high credit score means that you are financially responsible, and a poor credit score means otherwise. Hence, you have to take care of your credit record and groom it so that you can acquire loans with favorable interests and services in the future.
Here are the five factors you should look out for that can affect your credit score.
Your payment history contributes 35% of your credit score, making it the most significant factor that can affect it. This is based on how punctual you are in paying your bills and debts, and how responsible you are in managing your finances.
Paying your bills and debts on time reflects a high score on your credit record. Payments 30 days or more late negatively impact your credit. That’s why settling your payments on time is highly encouraged.
Remember that the longer you are delayed in paying your bills and debts, the bigger the deduction will be on your credit score. For this reason, never wait for your account to be sent to collections, as this is the biggest red flag for lenders.
How Much You Owed
The second factor that will significantly affect your credit score is the amount you owe, which bears 30% of your credit score. The Fair Isaac Corporation (FICO) evaluates a person’s credit utilization ratio by examining how much of your available credit you are using.
Lowering your credit utilization ratio will help your credit score to go up. Ensure that you are not using 30% or more of your available credit to maintain a good credit score. The credit utilization ratio goes down whenever you make payment. Therefore, paying on time will improve both your payment history and credit utilization ratio.
Credit History Length
How long you are using credit makes up 15% of your credit score. The longer you are using credit, the greater its impact on your credit record. FICO will look into how old your first credit account is and the average length of all your accounts.
Having a long credit history is good only if it does not incur late payments and other negative factors that affect your score. You can lengthen your credit history by keeping your old accounts open, which is also advised by finance experts. By doing this, you can make sure that your credit score will increase.
Moreover, your open accounts don’t need to be utilized, leaving them open to age by themselves is enough to boost your score. FICO requires a minimum of 6 months for your credit account to be open to calculate your credit score.
Newly opened accounts aged six months below will not be enough to include in calculating your credit score. Additionally, closed accounts will be visible in your credit history for a minimum of 10 years.
New Credit Inquiries
Every time you apply or inquire for a new credit account can impact your credit score by 10%. FICO evaluates how many new accounts you recently applied for since you opened your latest account.
When you apply for a new credit account, no matter what kind of credit that is, the company you are applying for can perform either a hard or soft inquiry on your credit record. A hard inquiry means that someone will ask for a copy of your credit report, which will shave off a few points from your credit score.
On the other hand, a soft inquiry won’t affect your credit score as it can occur even if you are not applying for a credit account. This type of inquiry is simply checking or reviewing a person’s credit report without digging deeper into details.
The number and kinds of credits you are using, like credit cards, auto loans, mortgage, and the likes, will affect another 10% of your credit score. As a matter of fact, having more open credit accounts will benefit your credit score.
The reason for this is, having multiple open credit lines means that more lenders approved your application because they see your capability. Having a mix of credit accounts can also reflect how well you manage your financial obligations. As long as you do not have any missed payments recorded over time, this will be beneficial for your score.
Having bad credit will not be the end of you financially. There are still loans available for bad credit individuals who wish to acquire a loan. However, maintaining a good credit score is still advised to avoid complications in your finances.
Recognizing the factors that will affect your credit score is important, so you can be aware of what to avoid and what you should do to improve your score. Also, being mindful of your financial obligation at all times will help you achieve a high credit score.