What Affects Credit Score?

Your credit score is a critical aspect that creditors such as banks, property owners, utility companies, and others consider when determining your creditworthiness. A higher score on the index will inform creditors and other financial institutions that you are more creditworthy and hence more creditworthy. However, do you know what factors are involved in determining your credit score?

There are five main categories of factors that impact your score.

1. Payment History- This has the highest impact on the score as per the model. It considers things such as whether or not you pay your bills on time. Creditors and credit referencing agencies prefer to see a consistent record of regular repayments. If you are always delaying paying your bills or once had your accounts put under collections, or you had charges on some of your accounts, your score will be lower. The more you make your credit payments on time, the better your credit score will be. One late payment, and if you are a newbie to credit, then you are in for the worst feeling ever.
2. Credit Utilisation - This is the ratio of the current credit limit to the amount of credit being used. This is determined for each credit card and loan that you have as well as the overall credit utilization. Analysts advise the credit utilization ratio to be below 30%. Making on-time payments near your maximum credit limit can significantly bring down your credit score. The percentage of credit used should be as low as possible.
3. Credit History Length - As with most lenders, the length of credit history defaults to the fact that the longer one’s credit history the higher the score. This is because the lenders prefer to see that the borrowed credit is used responsibly and the payments made over a sustained period. Just because you have had credit cards for years and use and close them less frequently within a short span, it will tell the lenders that you are a good person to borrow from. For those who have a thin credit file or a short credit history, it may not be easy to obtain a very high score.
4. Credit Utilization - The majority of professionals advise consumers to have both, revolving credit such as credit cards, and installment credit such as auto loans, mortgages, or student loans. This is an advantage since it proves that one can handle various types of credit appropriately. However, do not apply for credit cards or loans that you do not need to simply diversify your credit mix.
5. New Credit - If you apply for several credit accounts within a short time, your score may drop regardless of whether you promptly pay your bills. This is because such activity may be considered by lenders as a sign of increased credit risk. Hard inquiries include every credit application and can reduce your credit score if done frequently. Avoid using new credit applications as often as possible and wherever possible apply for credit in small batches.

In addition to these main categories, a few other behaviors can negatively impact your credit.

• Neglecting long-standing credit accounts, and may affect one's credit history and credit mix negatively.
• Having something in your credit report that is incorrect such as an account that is not yours. It is important to challenge any inaccuracies with the credit reference agencies as soon as possible.
• Taking multiple loans or credit accounts within a short period to reduce the interest rate and also get some percentage off. Using too many hard inquiries will bring down your score.
• Currently, high credit card balances or usage rates are above 30% of the total credit limit. Despite the timely payment, high balances imply risk.
• Sacrificing money that you do not require, and opening retail credit cards that you do not need. Just like with credit accounts, having many store credit cards can also be detrimental to your score.
• Missing debt payments. It is advised to set up automatic payments in cases when there is a possibility of forgetting the due date.
• Paying for things with money you cannot afford to have taken away in the form of interest or have to make payments for. This could lead you to pay bills late or in some extreme cases default on your obligations.
• Additionally, co-signing on loans for anyone with bad credit because their failure to pay can also harm credit standing.

The important thing is to keep checking your credit report to see what is going on. You can get one free report each year from each of the three credit reporting companies via the website annualcreditreport. com. It can also be obtained every month from many credit card companies and other private credit monitoring services. Keeping up with your score and reports is important so you can correct things before they get worse or are reported to the bureaus if possible. Consistently paying your bills on time or paying off your credit balances within the grace period is the best way to build a good credit standing. If you feel lost on what you need to do or have certain questions regarding what does your score or creditworthiness, it is always wise to speak to a financial counselor.

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