Factors That Affect Your Credit Score – Your credit score is one of the most important financial metrics that will govern your life until way past your retirement age.Most debt sticks with us for a good part of our adult age and how well we learn to manage it,juggle it and eventually pay it off will ascertain the quality of our life.
Your credit score will determine important things like borrowing rate,interest rate,loan viability,repayment capacity,debt management and many more statistics about your money than you could guess.Just as your Social Security number can tell the authorities innate details of your life,so can your credit score.
Factors That Affect Your Credit Score –
Credit Utilization – I have put this as my number one point because it accounts for close anywhere between 25%-35% of your total credit score.It is the ratio of your credit usage on the card versus the total limit.If you have a $500 limit and spend $250 of it,the you have a 50% credit utilization.
A good number to be at would be around 30%.You can do this by making regular payment each month on your card and keep the balance below the 30% mark line.Not only is paying back more than the minimum due good for your credit report,but also shows the card issuer you have a good repaying capacity.This inturn will allow the card issuer to raise your credit limit in future.
It is an extremely important part of your score that needs to be maintained in order to ensure it does not have an adverse effect and be a black marker in your credit history.
The most important aspect of your credit score is your payment history.This is a gauge of how fast you can repay debt and money that you owe to institutions and utility companies.It is a vast umbrella of all your financial paybacks on bills through the current financial year and is also a good indicator of your repaying capacity.
Below are some of the repercussions of a negative payment history,and if you have experienced any of these,it will be go towards lowering your credit score.
Write off -If by chance you are delinquent on a credit card debt and are unable to pay it off, even after several attempts of collection, it is usually “written off” or “charged off” by the card issuer.This sends a negative signal because you could not pay off the card bill.
Repossession – This usually is happens when you cannot repay an automobile loan,and the collateral for the loan is the vehicle itself.The lender will take back the vehicle from your possession and is a serious inability to make monthly payments which will cripple your credit score
Bankruptcy – One of the worst forms of financial disaster is bankruptcy and can be a huge red spot on your credit report.It is such last step in your fight to regain financial control of your debts,and stays on your credit history for all time.
Foreclosure – Inability to pay off the mortgage also after a succession of missed and delayed payments will be recorded on your payment history of your credit score and will work towards pulling it down.
These are of two types- hard and soft credit inquiries and can affect your credit score in a small way.The number of times a hard inquiry is made on your FICO score,the worse it is.This usually happens when you are submitting an application to a lender for a credit card,house loan,auto loan etc.Each time the lender will send hard inquiry to get details of your credit score.
This hard inquiry is an investigation of sorts,and the lender will try and ascertain your repaying potential along with past credit history to make sure you are not a low risk individual,before it can sanction the loan or the card.
In the previous article i told you how it was a bad idea to close credit card accounts that were old.Its better to keep them active and alive,even if there is no balance on it.One of the major reasons for this is that your credit score takes into account the age of your financial experience ad since how long you have been in debt and since how long you have managed it.
This shows that you can successfully pay off debts and bills on your independent income,and in future it would be less of a risk to lend you more money or sanction you a new credit card.
Also known as credit mix,it shows the different types of credit that you have experience with handling like – Mortgage home loans,student loans,auto loans,credit cards,retail cards etc. The more of these that you have and the more diverse your range of debt- the better it is for you.
This may seem confusing,because it would mean that you have outstanding payments from all walks of life.This is not a bad thing,and it only means that you have forayed into a broader scope of credit and are successfully managing all of it together.It is a positive step towards getting those extra 10% points on your credit score.