Credit rating companies compile data from your financial activities and use it to calculate your score. The score determines whether you will get loans, and at what interest. Lenders figure out your likeliness to pay debts back using the figures. Insurance companies have also started to use credit scores to make crucial decisions concerning individuals. Hence, you need to build and protect your score. Although credit score companies do not reveal the exact formula they use to come up with the figures, here are the main factors that affect your credit score.
Your credit payment history greatly affects your credit score. Lenders need to be sure that you will pay your debt on time. Payment issues such as bankruptcy and repossession can affect your credit score to a considerable extent. They make it almost impossible for you to qualify for any credit. To improve your credit score, make timely debt payments consistently. Late paying negatively affects your score. They see someone who did not pay their debts on time several years ago to be of less risk than one who has paid them late a few months ago.
Every time you apply for credit, creditors include an inquiry in your credit report. It shows that you have made a credit application. Several applications within short spans lower your overall credit score. Fortunately, they do not consider credit inquiries that are more than 12 years old.
Credit history length is the average period you have held your credit accounts. Longer credit history lengths lead to higher credit scores, as long as there are no late payments or other negative issues. An older credit will increase your scores, as it depicts that you have the necessary credit management experience. Keep old accounts even if you no longer use them, especially when your payment record is excellent.
Types of Credit
The types of existing credits you have contribute to your overall score, although not to a great extent. Examples of credits include mortgages, credit cards, and store accounts. Historically, lenders view borrowers with different kinds of credit to be of lower risks. It shows that they have vast experience when it comes to managing them.
The number of credit accounts you have applied for in recent days will affect your overall credit score. If you have opened new accounts within a short span, lenders tend to assume that you are having financial difficulties. New accounts lower your average account age. Low average account age, in turn, lowers your credit score. For you to have a high score, reduce the number of credit applications.
Being aware of the factors that affect your credit score will enable you to identify the areas you need to improve on. It is good to keep your scores high, as lenders will not give you loans when your scores are low. They will consider you to be a risky borrower. You can easily access your credit score and full report through companies like Experian.