Your credit score is significant, as it either makes you have higher chances of getting a loan or not. A low credit score means you are more likely to get loans that have high-interest rates. This is the reason why it’s crucial to ensure you continually ensure it improves.
Different items go into calculating your overall score. It is not based on only one thing; there are credit card debts, rent payments, mortgages, auto loans, and such.
Here’s what goes into calculating your credit score.
1. Credit history
Two significant factors affect your credit score, your bills, and your debt. The length of your credit history significantly affects your credit score. Several factors go into determining the length of the credit history:
- Age of your oldest account
- Length of time since you opened your newest account
If you have several new accounts, they could lower your score.
If you’ve had an account for longer, the higher the credit score. However, what’s also considered is if you’ve had timely payments. It doesn’t cut it to have an old account. The credit history accounts for 15% of the total credit score.
2. Your payment history
One of the most crucial things that make up the credit score is if you can pay loans on time as this caters for 35% of the credit score. Do you pay bills on time for every credit account? Every late payment affects your credit score negatively. It is normal to pay some of your bills late, but how far off from the payment date you pay determines how your score behaves.
Credit issuers do not start reporting late payments until you miss two consecutive days or after 60 days. How late you paid is what determines how low your credit score goes.
You could lose 25 to 50 points off your score, which is significant to make you have a low credit score, which may not qualify you to get loans.
Also, if any of your accounts have been sent to collections, this is a red flag for other possible lenders, which could see you not qualify for future loans.
Rent payments have started being included in your credit score believe it or not. The newest scoring models, FICO XD and FICO 9, have started including rent payments to come up with your overall credit score, as explained here https://www.crediful.com/rent-payments-build-credit/ and can help build your credit score.
Consider that, somebody who missed a few credit card payments five years ago is seen as a lower threat than somebody who missed a significant payment this year.
3. The amount owed
Have you previously heard about the credit utilization ratio? You may be making timely payments, but what if they are too much to handle? FICO, one of the credit rating companies, takes into account how much total debt you have in comparison to your credit limits.
The credit utilization ratio is the amount owed in credit card debt as compared to your credit limit.
A high credit utilization indicates that you are spending too much on paying debts, which makes you at risk of defaulting. A low credit utilization rate means you are spending less than your limit, which signals you can manage your debt effectively.
You need to maintain a credit utilization ratio of 30% or less. For example, if your credit card limit is $2,000, make sure your balance is $600 or less.
To keep your credit score high, ensure you have a utilization ratio of 30% or less.
4. Any new credit
The amount of new credit you take on accounts for 10% of your credit score. Any time you apply for a new loan, the potential lenders will make an inquiry (often a hard inquiry or a hard pull), which involves retrieving your credit information. These pulls can cause a slight decline in your credit score.
Try reducing the number of loans you apply for in a year as this may communicate you are experiencing financial problems.
5. Your credit mix
Another criterion used to determine your credit score is your credit mix. The credit mix is the type of accounts you have that make up your credit score. This could be student loans, auto loans, mortgages, and credit cards.
This accounts for 10% of the credit score. If you have different lines of credit, you could have a high score. However, don’t just apply for various loans because this could, in the real sense, affect your rating negatively. Only apply for loans if it’s really necessary.
Your credit score could be the key to getting better lending terms. A high credit score helps you get excellent loan terms with fair interest rate terms. Always make sure you check your credit score at least annually to ensure every information on it is accurate and also to help you work on improving it.
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