March 4, 2020
The Biggest Factors that affect your credit score
Before you decide to take a car loan or a new credit card or finally apply for that Mortgage with a reasonable interest rate, you must first determine your credit score.
And this is one of the top reasons why people get rejected on a mortgage or loan; they have a bad credit score, and sometimes, they do not even realize it.
The status of your credit score will usually affect every financial decision you make now and the ones you will make in the future. Say, for example, you decide to get a loan. No big deal, right?—just paperwork, and that’s it.
However, you also have a history of reckless spending beyond your credit card limit and delayed payments on previous bills. The chances that you will get the loan is doubtful. Why? Late bill payment and using your credit card way above the available credit are just some of the factors that will result in a bad credit score and affect your ability to secure a loan.
So what is a credit score?
A credit score is a number—gotten from the analysis of your credit history—used to indicate your creditworthiness. A registered data collection agency compiles credit score through information about your financial activities.
Think of it like a receipt: of all the wrong financial decisions you’ve made. Or the good ones.
A high credit score (which is in the region of 750 above) will give you the least interest rates on mortgage and loans, while a low credit score attracts high interest or disapproval of loans.
Typically, the majority of lenders always look at your credit scores before deciding to grant you a loan, and insurance companies check it to weigh the potential risks before issuing insurance policies. So, you must maintain an excellent rating or face the risk of living in financial misery.
Numerous factors affect your credit score, and we will look at the most significant ones below
- Payment History: Well, there’s no surprise, is there? If you’re a lender and you want to loan out your money to an individual, there’s no denying that you would want to see how they have fared with previous agreements.
So this is precisely why payment history accounts for 35% of your credit score.
Late payments of bills will adversely affect your score, and it gets worse with the extended time it takes you to make payment.
Similarly, missed payments of recurring frequency will significantly impact on your rating.
2. Length of Credit use: A long credit history indicates a level of financial responsibility, and this takes up 15% of your credit score
For lenders, one measure of your financial experience is through extended use of credit.
Nevertheless, if you have the history, it will not count for much if missed payments, debt settlement, or bankruptcies history are the order of the day.
3. Credit Utilization ratio: This is the second most crucial factor that affects your credit score, and it amounts to 30%.
It is the measure of how much you’re spending in comparison to your available credit limit.
A debt of almost 50% as much as your credit limit is a red flag for lenders and ultimately, has an adverse outcome of low credit score
Many financial analysts advice that you keep your credit utilization ratio under 30% to be on good credit status.
4. Types of credits: having a variety of credit cards and installment loans gives an edge on your credit score as it showcases your fluency in credit management.
Not to worry, if you do not have installment loans or other credit cards, this factor only makes up for 10% of your total credit rating. So, you can still be on the safe side if you have
a good standing on the other aspects.
5. Number of credit applications: This makes up the final 10% of the score and it is for good reason. When you log in an unhealthy amount of credit applications in a short period of time, it reflects negatively on your credit score as people tend to apply for numerous credit when preparing for a spending spree.
Or to settle a large debt. Lenders will be reluctant to grant you loans if you are showing the behavior of a risky borrower or if—and hear us out—there’s the tiniest chance that for 0.0000001 second, you are thinking of running off to Ibiza.
There you have it: the major factors that influence your credit score.
And working to improve them is one of the best ways of securing your financial future.
