A credit score is a critical number in each person’s financial experience. It influences the ability to get credit cards, personal loans, mortgages, insurance premiums, and the interest rates attached to the credit. As we saw that credit rating is such a crucial decision maker, it is vital to know which factors cause the most impact. Here are the aspects of credit that affect your credit score the most of hits.
Payment History If you have a bad payment history then this is likely to reflect on your credit score in a big way. When payments are made on time, it proves to the lenders that you are creditworthy while if the payment is made later than expected, then lenders are shown that the borrower is high risk. Credit payment history is one of the most critical factors of FICO Score making up to 35 percent.
Specifically, your score looks at:
- Whether you have ever made any delay in paying credit accounts. This encompasses all kinds of accounts; credit cards, store accounts, installment credits, and mortgages among others. Even a single 30-day trial overdue can reduce your trial the effect increases in proportion to the number of trials overdue.
- Judgments, bankruptcies tax liens, wage attachments, and foreclosure information that are part of the public domain can hit your credit scores badly and the negative remarks may appear in your credit report for up to 7-10 years. Individual bankruptcy records remain on a credit report for a decade and corporate bankruptcy records remain effective for seven years.
- How many accounts indicate some payments were not made on time – the more the accounts, the worse it is for the score. While one or two late payments may be considered a one-off occurrence, multiple late payments demonstrate that the borrower poses some level of risk to the lender.
- The regularity that your payments are made. One needs to understand the difference between a 30-day late and a 90-day late payment. But then again, suppose the account was sent to a collection agency, then that is the same as 90 days late.
- When the lateness of the payment has occurred can also be relevant – more recent lateness is more painful. Such effects are time-sensitive and, if your late payments were made years ago, they will have less influence on your score.
Amounts Owed Second, your amounts owed or credit utilization is also a factor that plays in the rating where the higher the percentage the lower the rating and this is 30%. This measures the proportion of your credit limit on a line of credit products you are currently employing, commonly credit cards. Ideally, it is advisable to keep your credit utilization ratio as low as possible, which means that the higher the credit limit, the better. Having cards at their limit and owing nearly the limit is worse for the score of the credit.
Length of Credit History Ideally, the longer the credit history, the better because long credit history means you are credit-worthy.
This makes up 15% credit-worthy core and evaluates two things:
- How long the credit accounts have been in existence and how active they are? In general, credit history is a measure of risk and the longer one has a credit history proves to be less risky. A credit history of five years looks less secure than a credit history of twenty years does, for instance.
- The average age of all your credit accounts in one place, or how long it has been since you opened a credit account. If you have recently applied for credit cards and many accounts have been opened for you then your account age reduces and hence your score suffers.
Credit applications are also included by the way here. Whenever you ask for credit, the checking of your credit records results in a hard inquiry on the reports. Inquiries are also costly to your scores in the sense that many hard inquiries in a short period mean that you are high risk.
Credit Mix Your credit accounts make up the tenth percentile, and they are classified by the type of credit accounts you possess. This is because the total score counts as an advantage that the credit history includes different types of accounts such as mortgages, auto loans, credit cards, and student loans among others as compared to being credited from a single source. But it is quite acceptable if you do not currently meet the requirements for some loan types and only have credit card accounts.
New Credit New credit accounts for only 10% of the FICO accounts that affect the credit score. The effector is the opening of several new credit accounts within a short period – this negatively impacts both the hard inquiries and decreases the average age of credit accounts. That is true, one single new account will not do much to the scores but opening many new accounts causes eyebrows to be raised. Furthermore, newly opened accounts do not have any payment history and therefore they are considered to negatively affect this particular aspect until you establish a record with the account. Do not create many accounts at a particular interval of time. There should be at least 6 months between the times when you apply for credit.
In conclusion, payment history, credit utilization, Credit history length and the number of inquiries made on one’s credit are the most determining factors of one’s credit score. Maintain healthy credit – do not miss paying bills for any one month, ensure that credit usage is kept to the lowest, ensure that credit records are not newly established, and do not apply for too many lines of credit. In this way, your credit scores will only be rising and will show lower credit risk with each of these good credit habits.
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