A credit score is essential whenever you go for a big funding for a house, car, personal or any kind of financial emergency. Lenders will always consider your credit score to determine the risk of lending money to you for any purpose. Credit card companies, car dealers, and mortgage lenders are the three main types of creditors who will check your credit score before considering how much you are worthy to get the funding from them and at what rate of interest. Insurance providers, your landlords, and employers might also check your credit score to evaluate your financial status. So, let us know the biggest financial factors that’ll sure affect your credit score.
1. Your payment history - affect 35%
The most important thing about your credit score that lenders and other creditors check is whether you are capable of repaying the fund that is lent to you or not. This aspect of your credit score verifies the following factors:
- Are you paying your bills on time every time or not? You need to pay for each and every account on your credit report. Paying your bills late will affect negatively on your credit score.
- If you used to pay late every time, how much late were you? Is it 30 days, 60 days, 90 days, or more? The more you become late, the lower will be your credit score.
- Has any of your credit accounts gone to collections? This is a significant alert for the potential creditors that you may not be able to pay the money at all.
- Did you go for debt settlements, any charge-offs, foreclosures, bankruptcies, lawsuits, wage attachments, liens or judgments against you? These items can really be very painful for your credit report and from a lender's perspective, you’ll not be considered as a trustworthy borrower.
2. Amounts you owe - affect 30%
Now we’ll check the second-most important thing of your credit score. Have you regularly check how much you owe to the creditors? Let us clarify a bit:
Did you calculate how much you’ve utilized of your total available credit? It is better if it gets low. But you need to have some credit balance in your account also, owing something is good for showing a credit account, it is better than owing nothing at all. Lenders like to see that you are using a credit account and borrowed money, and you have that responsibility to pay it back.
How many accounts you are maintaining and how much you owe to the lenders? Your credit accounts may be a mortgage, auto loans, credit cards and may be installment accounts. Having a mix of several types of credit accounts is good for building a good credit score. You need to manage them perfectly.
3. Length of your credit history - affects 15%
Another deciding factor of your credit score is how long since you are using credit. Do you know how old is your oldest credit account? And do you know the average age of your total credit accounts?
If you are maintaining a long and dispute free credit history, it is very helpful for your credit score. But a short history may also be working too if you continue your payments on time every month.
4. Your new credit lines - affects 10%
Your total new accounts can be considered by the FICO score. It’ll consider the number of new accounts you have applied for, and last time when you have opened an account.
According to the credit score assumptions, if you have recently opened several new accounts, your credit score might be in bigger problems. Normally, people used to open new credit accounts if they face cash flow issues or want to take lots of new line of credit.
If you have frequently opened many new credit accounts, this may give a signal to the lender that you are thinking off gathering credit in the coming days. That means you may not be able to carry out the entire monthly mortgage installments, or the loan payments you applied to the lender. So, the lender would use your credit score to set a parameter of a credit risk they might want to take on you.
5. Types of credit you use - affects 10%
As per the FICO formula, the types of credit you use can determine your credit score. You may have a mix of different types of credit, such as credit cards, store accounts, installment loans, and mortgages. It also looks at how many total accounts you have. It is a minor aspect of your score, so you don't have to worry about it if you don't have accounts in each of these categories.
Your credit score is the most important factor for being approved for several loans and new lines of credit. It also helpful to have the best interest rates available in the market. But for that reason, you don't need to be obsessive to maintain your credit guidelines. Practically, managing the credit with due responsibility and wisdom, your score will rise.