What Factors Affect A Credit Score?
Credit score therefore plays a crucial role in credit application assessment among lenders. The higher the credit score the better the chances of being offered new lines of credit and at better terms. Knowing what affects the credit score enables one to regain control and create a positive credit history. Here are the major components of credit scores and ways to build a good credit score.
Payment History Payment history has the greatest impact on determining your credit score. Most lenders prefer to have evidence of timely repayments for any type of credit including credit card, car, student, mortgage, personal, and retail accounts. The credit history is the most critical factor of FICO credit score since it contributes 35% of the total score. One or two negative entries reduce the score while positive and regular payments help in building up the score. If any of the accounts show a missed payment, try to bring these accounts current, and ensure that all subsequent payments are also made on time. Furthermore, to benefit from the credit history, it is advisable to have a lot of years of on-time payments.
Credit Utilization The second most significant factor of your credit score is the credit utilization ratio. This shows the proportion of your limit on your credit cards that you are currently utilizing. It is arrived at by using the following formula, total outstanding revolving balances/total credit limits. Industry specialists advise that the optimum should be below 30% and the lower the better. A balance that is higher than 30 percent of your credit limit even when you pay your bills on time is considered risky. Make as many payments as possible to reduce the balance to the barest minimum. You can also request higher credit limits from your credit card providers which in turn will reduce your credit utilization.
Credit History Length The age of your credit accounts and the average age are also included in the computation of your score. In most cases, a longer credit history is a sign of lower risk to most potential lenders with improved credit scores. This factor constitutes about 15% of the FICO score. It is also not advisable to open several credit accounts within a short span as this reduces your average account period. Always allow your oldest accounts to remain dormant, while not abandoning them entirely and making small purchases from them occasionally. If you have a poor credit history, you may have to wait for this factor to change over time.
Credit Mix Although not as important, the fact that you should have a blend of different types of credit will also benefit your score. Fixed loans such as mortgages, auto loans, and student loans are considered differently than the credit cards that are considered as revolving accounts. A combination of both is good to show that you manage the credit responsibly and are capable of handling both. But do not open accounts you do not need just to add a mix – as hard inquiries and lowering your average account age could harm your score.
New Credit When lenders pull your credit, they can see hard inquiries made when you apply for loans or credit cards. Many recent inquiries suggest high credit risk and future financial problems for an individual or a company. Hard inquiries can cost a few points each, and multiple inquiries show credit desperation. It is advised to restrict it to roughly six inquiries or less in 12 months. Also recall, that multiple rate shopping inquiries for some specified consumer loan types, for example, mortgages or auto loans are considered to be a single inquiry if performed within a short period.
Adhering to these best practices regarding credit management will assist in achieving the optimum credit rating in the long run. Remember, it takes work to build good credit and it depends on each of these factors. Be proactive by reviewing your credit reports from the three major bureaus at least once a year. dispute any inaccuracies immediately. That is why having healthy credit habits can help achieve good scores and maintain them for a long time.
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