Want to know what affects your credit score? Keep reading to get the full information. Simply put, a credit score is a value that shows how likely you are to pay back a loan on time. A scoring model uses all the information on your credit reports to report and create these credit scores.
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What Affects Credit Score
Knowing the factors that affect your credit score will help you maintain the best habits.
Credit scores are determined by several factors including when you pay your bills and debts and the length of time you have used credit.
A very good understanding of what affects your credit scores will help you plan the most effective way to build your credit or protect it.
Your credit score is calculated by companies using data from your credit reports. Although they won’t reveal the exact formula they use, the basic factors used to get these figures are not kept as secrets.
This information is very important because your credit score usually holds the key to other areas of your life. The possibility of getting a loan and at what interest rate; whether you can buy or rent the type of apartment or house you want; how much you will pay on car insurance and utility deposits.
Why Is Credit Score Important
In these times, Individuals and ventures are dependent on their credit scores. This is because the entire system of credit availability and the period of acceptance of your credit offer depends on your credit score.
To get the best loans, you must have a very good score. With a very good credit score, you can get the best and most attractive insurance options. The right credit score will even give you the right image in the presence of your employer.
With a very good credit score, you can get grants without much stress. More importantly, you will be given opportunities to get loans at very low-income rates.
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What Is a Good Credit Score
Credit scores are three-digit numbers calculated from your credit reports. These numbers range from 300 to 850. This information includes your payment history, the number of debts you have currently, and the length of your credit history.
Although there are different scoring models, generally, ideal or fair credit scores range from 580 to 669; good credit scores range from 670-739; very good credit scores range from 740 to 799 and excellent credit scores are from 800 upwards.
Having an excellent credit score means that you have demonstrated and maintained the right credit behavior. This will grant lenders the confidence to give you loans with very low-interest rates.
What Are The 5 Factors That Affect Your Credit Score
Now, here are the five major factors affecting your credit score;
This is one of the most determining factors of credit scores. If you have a long history of on-time payments, you will have a very good credit score. Missing payments could probably hurt them.
The negative effects of missing payments increase the more payments are left unpaid. This means that if your payment is left unpaid for 30 days, it may have a less negative impact than being left for 60 days.
Credit usage is a very important factor that affects your credit score. It gives a swifter effect on your credit score.
If you have remnant debts on your credit cards, mortgage, or your student loans, it could have a very bad effect on your credit score.
Another important factor under this is your total utilization rate. This explains the ratio between the total amounts you still owe and your total credit limits on all your revolving accounts. Lower utilization rates are seen to have a better effect on your credit score.
Length Of Credit History
Under this, there are lots of factors. Take a look at the determining factors below;
- The age of your oldest account
- The age of your newest account
- The average age of your accounts
- How soon you have used an account?
When you open new accounts, your average age of accounts can be lowered and your credit scores could be hurt.
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Credit Mix and Types
Another factor that can improve your credit scores is to have different types of credit card accounts and installment student loans.
The key factor is the combination of different types of credit without hurting your credit score. If you already have a credit card, you could seek an installment loan additionally.
Creditors may review your credit reports and scores when you apply to open a new line of credit. This is known as a credit inquiry and may stay on your credit reports for up to two different years.
Inquiries called soft inquiries won’t hurt your credit score. Alternatively, when a creditor performs a hard credit check before making a lending decision, your credit scores can be affected adversely.
What Affects Your Credit Score the Most
The two major scoring companies; FICO and VantageScore agree that the two major factors have the most effect on your credit score. These factors are your payment history and credit utilization.
According to FICO, payment history accounts for 35% of your credit score, and credit utilization accounts for 30% of your credit score.
On the other path, VantageScores agree that credit history accounts for 40% of your credit score and credit utilization accounts for 20% of your credit score.
What Affects Credit Scores Negatively
Having known the various factors affecting your credit score, it is worth noting what habits can cause great harm to your credit history and credit score. Below, I have listed out the most prominent;
- Late or missed payments
- Collection accounts
- When account balances are too high
- When the balance you have on revolving accounts, such as credit cards, is too close to the credit limit
- When your credit history is too short
- When you have too many accounts with balances
How To Improve Credit Score
Here are the best ways to improve your credit score;
- Pay off your revolving credits before the deadlines
- Increase your credit limits
- Check your credit reports for errors
- Make sure all negative entries are removed from your credit reports.
What Does Not Affect Your Credit Score
The following activities do not affect your credit score;
- Checking your score
- Rent and utility payments
- Income and bank balances
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Frequently Asked Questions
Which Credit Score Matters the Most?
Whichever credit score is being verified by the company you are working with is the one that matters the most. The organization you apply to can choose how and where to check your credit when you apply for a loan, credit card, or any other type of credit. FICO scores are typically used the most, particularly in loan scenarios.
How do you get a 750 Credit score?
To get a good credit score like this, you must maintain the right habits. These habits include; paying your bills on time, having an open credit card account that is in good standing, and maintaining low credit utilization for months and years.
Who Calculates Credit Scores?
In the United States, there are three credit bureaus with national significance; Equifax, Experian, and Transunion. These companies dominate the market for collecting, analyzing, and disbursing information about consumers in the credit markets.
What Affects Your Credit Score the Most?
According to the FICO and system of calculation, your credit or payment history has more effect on your credit score.
What Causes Low Credit Scores?
Late or missing payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may result in shorter overall credit history), or applying for new credit accounts are just a few of the factors that might cause a decline in your credit score.