Your credit score is a powerful and influential number that will impact your life in numerous ways. It will help lenders decide whether to approve you for a loan. It will also determine the type of loan you can apply for and the interest rate you pay.
Today, even some unexpected businesses like insurance companies use credit scores to aid in their decision-making, which may make consumers with low scores have to look for specific non-credit-based car insurance. Some utility companies also check your credit score before setting up your home for a new service. Even some employers are looking at the credit history of potential candidates before deciding to give an individual a job, a promotion, or a raise.
Below are five essential factors that influence your credit score:
Your Bills Payment History
Your bill payment history accounts for 35% of your total credit score. How promptly and timely you pay your bills will impact your credit score more than other factors. Some severe payment problems such as collections, charge-offs, bankruptcy, tax liens, repossessions, and foreclosures could harm your credit score.
If your credit score is low, it makes it almost impossible for you to get approved for a loan and any other thing that requires good credit. Making timely payments every month is one of the best things you can do for your credit score.
Your Debt Level
Your debt level will contribute to 30% of your credit score. Credit score calculations like the FICO score consider a few key factors that are directly related to your debt level. These factors include your overall debt, your credit utilization ratio, the ratio of your credit card balance to your credit limit, and your debt balance to the original debt amount.
It’s advisable to keep your credit card utilization ratio below 30% or less. This means that you should always keep your credit card purchases around 30% of your card’s available limit.
Having too much debt or a high credit card balance can negatively impact your credit score. As you pay your balances, you can quickly improve your credit score.
The Age of Your Credit History
What is the age of your oldest credit account? Your credit age accounts for around 15% of your credit score, and it considers both the average age of all your credit accounts and the age of your oldest account.
If you have an older credit account, it will improve your credit score as it shows that you have a lot of experience handling debt. Read this article for additional information on how to improve your credit score.
Closing old accounts and opening new ones will significantly reduce your average credit age. Therefore, it’s essential to keep your old accounts open. It’s also advisable to avoid opening multiple new accounts at the same time as they could interfere with your average credit age.
The Kinds of Credit on Your Report
There are two basic types of credit accounts. These include installment loans and revolving accounts. Having both of these accounts on your report positively impacts your credit score as it indicates that you have experience handling different types of credit.
An installment credit often constitutes loans where you borrow a fixed amount of money and sign an agreement to make monthly installments to offset the overall balance until you pay off the entire loan. Examples of installment accounts include personal loans, mortgages, and student loans.
On the other hand, revolving credit accounts are often associated with credit cards. They also include some types of home equity loans.
Revolving credit allows you to have a credit limit and make minimum monthly payments based on your use. Revolving credit does not have a fixed term and is often fluctuating.
The impact on your credit score is even better if you have numerous loans for different types of assets. These assets may include a home, a car, and credit cards. It’s even better if you have a personal loan or a student loan in addition to the asset loans.
Unfortunately, the type of loans you have only accounted for 10% of your credit score. Thus, if you don’t have certain types of credit, such as a revolving account will not necessarily impact your credit score.
The Number of Credit Submission Applications
Wherever you apply for a loan or submit an application requiring the lender to run a credit check, they place an inquiry on your credit report to show that you made a credit-based application. Credit-based inquiries constitute around 10% of your credit score.
Less than three applications may not hurt your credit score much. However, numerous inquiries, especially when done within a short time, can significantly reduce your FICO score by taking some points off. Ensure you keep your applications to a minimum to protect your credit score.
When you apply for a new credit account, the lender will do a hard pull. A hard pull is a process of checking a borrower’s credit information during the countersigning procedure. This is quite different from checking your own credit report.
A hard pull typically causes a temporary credit score decline. That’s because the score assumes that you will be a greater credit risk because of the numerous new accounts you opened. Most people tend to open multiple credit accounts when they are going through some cash flow issues.
Fortunately, only inquiries that you made in the last 12 months will matter regarding your credit score. After two years, any credit-based inquiries will completely be erased from your report. However, checking your information only results in a soft inquiry which doesn’t impact your score.
Are You Ready to Improve Your Credit Score?
Your credit score is an essential aspect of getting a loan approved and getting the best interest rate. Lenders, employers, and even insurance companies will look at your credit score.
While the above factors impact your credit rating, there are numerous things you can do to increase the score. Some of these include paying your utility bills on time, making any outstanding loan payments, and disputing any inaccurate information on your credit card reports.
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