Your credit score is the number which lenders use to assess how risky it would be to lend you a sum of money. Every type of lender out there will check your credit score when you apply for a loan and before they grant it to you. Apart from that, your landlord, some insurance companies, and employers can also take a look at it to assess you. Therefore, knowing the credit score factors that affect it is highly important. Here they are.
1. Your Payment History
This stands for 35 percent of your credit score. Here’s how you must look at this particular factor. When you try to borrow some money from a lender, there is only one thing on their mind. Will I get this money back? To answer this question, they have to look at your payment history and just how trustworthy you were in repaying the money you were lent by others before.
- Were you ever late in paying?
- If so, how late? 30, 60 or 90 days? More than that? The more it is, the worse it will be for your credit score.
- Have your accounts ever gone to collections? This is a huge red flag, so pay attention to it.
- Did you ever have lawsuits, bankruptcies, debt settlements, charge-offs, wage garnishments or foreclosures?
2. The Amount You Owe
This factor stands for 30 percent of your credit score. Alright, let’s say you can make all your payments when they are due. But can you actually afford this loan? This is where your credit utilization ratio comes in. It will measure how much of your income already goes to existing debts and how much of what is left you can actually use for a new loan.
3. The Length of Your Credit History
It stands for 15 percent of your credit score and is one of the most important credit score factors. How long have you had your accounts for and how long have you been using your credit cards? A long history with credit is a good sign and will help your credit score, as long as you made all your payments on time. It means you are a trustworthy candidate. Still, if you’re a newbie, that doesn’t mean they won’t grant you the loan.
4. New Credit
This one represents 10 percent of your credit score. It’s the factor that looks into how many accounts you have opened up recently. The idea here is that if you have opened a lot of them in the recent past, then you may be a risky person to lend to. Individuals with this type of financial behavior usually have cash flow problems.
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5. The Types of Credit You Have in Use
Another 10 percent goes to this factor. Lenders check to see if you have a combination of credits. This can include mortgages, credit cards, installment loans, store cards, and so on. They also want to know how many of them you currently have. It’s a good idea to have a mixture of them because it will up your score. However, if you don’t, do not open them just for a loan. It won’t look good on the application.
Knowing your credit score factors is important in assessing just how well your credit score is doing. However, there’s no need to obsess over details and numbers yourself. As a rule of thumb, if you have always made your payments on time, everything should be fine. Good luck!