Always in doubt about what actually affects your Credit Score? No more confusion now! 5 biggest factors that affect your credit score. To know these factors, it’s important to know what exactly is a Credit Score.
A Credit Score is an extremely powerful number that depicts your creditworthiness and plays a vital role in affecting your financial life. This number ranges from 300 to 850. In other words, it is the number that determines the interest rates you pay for credit cards and help lenders to determine the risk of lending you their money. The higher your credit score is, the safer to loan the money for the potential lender as they use this number or credit score to analyze whether you can repay the loan timely or not.
There are various types of lenders such as auto dealers, credit card companies and mortgage bankers, that will check your credit score to see how financially responsible you are. Insurance companies, landlords, and employers may also analyze the same before providing you their respective services.
Here are the 5 biggest factors that can affect your credit score:
- Payment History
Payment history is the most important factor in affecting your credit score which determines 35% of it. Lenders look at your credit history to analyze whether you can repay their loan or not. In other words, they confirm if you are trustworthy enough to repay their funds.
The foremost factor determined in your payment history is whether you pay your bills or make your payments timely or not. If you have paid late, how late were you in completing your payments. To maintain a good credit score, you must pay your bills timely each month as late payments can have a negative amount on your credit score.
- Amounts Owed at Present
The second most factor determines 30% of your credit score. The FICO score (Credit Scoring Calculation) considers the amount of debt you carry at present compared to your available credit limit (also known as Credit Utilization ratio).
According to the guidelines, your credit card utilization should be at 30% or less because having too much debt can have a negative impact on your credit score.
- Credit History
This component determines 15% of your credit score. Your credit score includes how old your oldest account is and the average age of your other accounts. Having a long credit age can be considered helpful, if there are no cases of late payments or other negative actions. This shows that you have a good credit handling experience.
Opening new accounts and closing existing accounts consistently does not give a good impact on your credit age. This is the reason why you should keep your existing accounts open, even if you are not using them at present.
- Types of Credit on Report
This factor determines 10% of your credit score which observes how many types of credit do you owe in your report, such as credit cards, installment loans, etc. owning a diverse variety of loans can increase your credit score and can be considered positive as it shows that you have a good experience of managing or handling various types of credit.
Having certain types of loans on assets such as car loans, home loan or even education loan can also have a positive effect on your credit score. As it constitutes a very less percentage of your credit score, not having any certain kind of credit may not impact so much.
- New Credit
This is the final factor that affects your credit score which constitutes another 10% of the same. This one considers the number of new accounts that you have recently opened and when was the last time you opened it.
If you plan to apply for a new personal loan, lenders usually do a hard inquiry, which is completely different from the soft inquiry. Hard Inquiry is basically a process of evaluating your credit information, particularly during the underwriting procedure. Hard pulls affect your credit score, yet temporary! In case, if you have recently opened a few new accounts, and the percentage of it is a bit higher, then you would be at a greater credit risk. We understand that you must be experiencing cash flow problems in your business and searching for ways to get more debts, but you need to know that opening new accounts frequently can definitely affect your credit score.
Therefore, try to minimize your inquiries and list of opening new accounts within a year to not to impact your credit score adversely.
What Factors Do Not Affect Your Credit Score?
People are often confused with what can or cannot affect their credit score. Here are the components that are included in the consideration of your credit score – Demographic factors such as Race, color, religion and national origin do not influence your credit score. Your Salary, Occupation, employment history, and employer also do not have any effect on the same. Other things that do not influence the credit score are Marital Status, the place where you live, how many children you have or whether you have participated in the credit counselling program or not.
How can you Improve your Credit Score?
If you want to improve your credit score and enhance your creditworthiness, Credit Triangle is the best option you can choose for the job. The credit triangle, with its effective services and solutions, can resolve all your financial problems including paying old dues, lending quick loans, filing ITR, and providing free credit reports with improvement plans. In addition, Credit Triangle ensures financial security to all its customers to make them feel free of all the risks.
No more financial burdens on your shoulders when Credit Triangle has your back!
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