What Affects Your Credit Score The Most?

A credit score is one of the major indicators that lenders, creditors, insurance companies, and other entities use in assessing the creditworthiness of any borrower. It helps them understand how likely you are to repay a loan or meet payment obligations on any credit facility. Thus, it is important to know what depends on the credit score, so that one can start to correct it.

The two most popular credit scoring models are FICO and VantageScore, and here are five aspects that comprise your score. These aspects are very sensitive and can greatly influence your organization for the better or the worse depending on how they are dealt with.

Payment History This makes up usually 35 percent of your total raw score. It quantifies your capability to pay off all kinds of credit accounts including but not limited to credit cards, installment loans, mortgages, student loans, etc on time. Creditors wish to know that you have been regular in paying your bills before they are willing to extend credit to you.

Any payment that is made a month within the due dates is normally considered to have been made on time which is beneficial to the credit score. But if you have several negative items, such as late payments, charge-offs, collection, repossession, foreclosure, etc., your credit score will be affected. Timing also plays a part – a 30-day overdue payment won’t be as damaging to credit as a 90-day overdue. This is because multiple missed payments escalate the effects.

Such practices as ensuring that you meet all your bill payment deadlines every month will help to increase your score. If you had problems with payment before, timely payments after that indicate that you have changed your behavior.

Credit Utilization Ratio The second largest determinant contributes up to 30 percent which is known as credit utilization or balances to limits ratio. This compares how much credit you have utilized to the total credit limit given to you. The ideal level of utilization should not exceed 30 percent for any given account and the lower the better.

What this means is that if one card is used frequently, it can greatly affect your score negatively. Limiting is quite hazardous, and it is most dangerous when it is taken to the maximum level. On the other hand, reducing the amount of utilization could help increase your credit score within a short time since this factor factors in the most recent statement balances.

Paying down balances on the credit cards, especially on the high limit cards is one of the ways of increasing the utilization ratios. Asking for a higher limit on your credit card without the need to use it is another good move. Similarly, measures that restrict the maximum number of accounts with balances can also assist in the regulation of total usage.

Credit History Length The Length of credit history accounts for about 15 percent of scoring and it’s the record of the accounts that you have opened and used to access credit. Repeat customers are considered less credit risks as compared to first-time borrowers, with a long credit history.

In general, the longer the credit history, the better. Keeping old, inactive credit cards or transferring balances to a new card could reduce your credit length and negatively impact your score in the short term. It is better to open several account types at different times as it will help to have both young and experienced lines.

If you do not have much credit history or if it is relatively new, one of the most effective things that can be done is to let your better accounts mature. With time, there appears to be less effect of new accounts and the average age also benefits from it. Only using credit instead of applying for many new accounts in a short time is another method of preventing the shortening of the history.

Credit Mix Lenders prefer to have one that proves you can be dependable in handling different kinds of credit such as credit cards and installment credits. It shows you are capable of managing accounts with different amounts and payment terms.

Payday loans, title loans, and pawnshop loans are all part of categories known as single-payment loans. Your various credit cards are considered as revolving credit facilities. Largely, it is advised to have at least one active and unsecured installment loan and credit card account to maintain a good balance.

Having both types provides some additional measure of scoring over just having credit cards or other revolving debt. Most scoring models saturate the possible mix benefit once you have 3-5 account types. Thinking that getting approved for several new loans to influence your mix factor will do the opposite is wrong.

New Credit The final ten percent of your score or so is comprised of new accounts and hard credit inquiries. While the act of opening new accounts is not necessarily a bad thing, it is synonymous with higher risk, and therefore, is going to adversely affect your score in the short term.

Having too many new accounts within a short period is a cause of concern as it may depict overstretching or insecurity of available credit. Each credit application also results in a hard pull, which will lower the score by a few points. However, the impact of new accounts and inquiries tends to decline in the future.

To offset these new credit risks, approach the formation of new credit risks with caution when applying for credit. Use applications as sparingly as possible to reduce the number of difficult blows to your history as much as possible. If you are going to shop for rates on a mortgage, auto loans, or credit cards, reduce your shopping timeframe. And remember, give more attention to your existing accounts rather than opening new accounts all the time.

That being said, the conclusion is simple – your financial decisions affect your credit score daily. It allows you to know your exact position and how certain activities can either benefit or harm your credit. The good news is that building favorable habits over time, like paying bills on time, maintaining low card balances, limiting your number of hard inquiries, and letting your accounts age will likely help your credit score increase.