Everyone knows that a low credit score is a bad thing, but very few people know the actual factors that contribute to it. Many people do damage to their credit scores without realizing that their actions are prejudicing their creditworthiness. There are numerous factors that are used to calculate a credit score and being aware of what they are will give you the ability to control your rating more effectively.
What’s your payment history? Your credit or payment history is the most important factor when it comes to determining your credit rating as it contributes to 35% of the score. If you have vigilantly paid your bills over an extended period of time then your credit score will benefit from your consistent and responsible payment. The lender will research if you have had accounts sent to collection agencies or if you have ever declared bankruptcy. If your payment history reflects either of these blotches then it will serve to lower your credit score quite drastically.
How much do you owe? The amount of money that you currently owe contributes to 30% of your credit score. All Americans have a credit limit and lenders become concerned if you get too close to maxing out on this limit. If people are too close to their limit then they are more likely to default on a payment and a lender would consequently hesitate in providing further credit. Lenders need to be careful about granting credit recklessly because they stand to lose great quantities of money should the applicant default.
What’s your credit history? The length of your credit history contributes to 15% of your credit score. If you have a longer credit history then this will benefit you, because the lender can establish trends over a period of time. If your credit history is short then the lender has no way to gauge to reliability of your payments. People who have a long credit history, which shows responsible payment, will score higher than those with a shorter history.
Have you made any recent applications? Lenders will often check an applicant’s recent credit applications in order to determine a credit score. This contributes to 10% of the score and it is important because an application could indicate a need for money and a need for money is a negative factor. Some applicants will apply for credit in order to cover unpaid bills and this will decrease his or her credit score.
Are you stable? Lenders will often favor applicants who are stable. Having the same residence for a period of three years will often improve your credit score. An applicant who is a home owner will also be favored because of the stringent requirements and responsibilities involved in home ownership.
What types of credit do you have? There are two types of credit, namely revolving credit and installment credit. Installment credit involves mortgages and car loans, whereas revolving credit involves credit cards. Applicants with a mix of these two forms of credit will benefit from a factor which contributes to 10% of the total score. People with varied forms of credit are regarded as more reliable than those that don’t. It is also important to note that credit cards issued by banks will be viewed more favorably than those issued by department stores.
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