Your credit score is not a mere number; your entire financial history and creditworthiness is measured and condensed to evaluate this three-digit figure, i.e., FICO score. This score determines whether or not you are eligible for a loan, and if you qualify, what your loan term and the interest rate are going to be. This three-digit value can range anywhere from 300 to 900, however, a score of 750 or higher is considered safe and strong by most lenders, non-bank financial institutions, and banks. So, let’s take a look at these five factors that greatly impact your credit score.
According to Fair Isaac Corporation, a data analytics company that evaluates FICO score, people’s payment history determines 35 percent of their credit score. Missing payments on your retail accounts, vehicles loans, and residential & commercial property loans can have an adverse effect, thereby causing your FICO score to drop by 150 points or more instantly. The information related to late payments remain on your credit report for seven years. If any of your accounts ever went to collections, then it is a red flag to the lenders that signifies you might not pay them back. Your payment history also includes the detailed information of bankruptcies and foreclosures, which stay on your credit reports for seven to ten years. If you have a good record of no late or missed payments on your accounts, your credit score will tend to be higher.
Amount Owed or Debt
The second most constituent element of your credit score is how much you owe. Having more than one credit cards and owing money on them does necessarily cause your score to plummet. However, there are heaps of variables that can negate your credit score, which include:
- Total available credit;
- Money you owe on various accounts;
- Specific types of accounts;
- Amount you owe in total;
- Your credit utilization ratio, and more.
In addition to that, if you owe a lot of money on cards or mortgages and don’t repay on time, it can drop your FICO score. According to myFICO, your debt amount makes up 30 percent of a credit score.
For example: Let’s say both Frank and Zack have $10,000 worth of available limit on their credit cards. Frank decides to utilize $8,000 worth of the credit while Zack only uses $2,000 of it, which means Zack’s credit scores will be higher than Frank’s.
When credit utilization ratio increases above a threshold point (30 percent), it shows that a person is biting off more than he can chew, and is more likely to make late or missed payments. That’s why it is important to keep an eagle eye on your spending.
Length of Credit History
Another important factor that can impact your score is the length of your credit history. Below we have outlined an array of prospective questions that potential lenders might ask you:
- How long have you been using your credit?
- For how many years have you had obligations?
- What is the age of your oldest & newest account?
- What is the average age of all your current credit accounts?
- When did you start using your credit?
Remember, this factor makes up 15 percent of a FICO score. In general, a longer history is better and can improve your credit scores. A shorter history is perfectly fine too as long as you have paid installments regularly.
Your newest credit accounts determine 10 percent of your credit score. Lenders conduct a hard inquiry to know if you have opened several new accounts recently, and if you did so, then when. The researchers at myFICO say that hard pulls can dip your score temporarily from 10 to 15 points. Banks and mortgagees assume that consumers who opened multiple lines of credit in a short period are a greater credit risk. It can negatively impact your scores, especially if borrowers have a short credit history.
Credit Mix in Use
The final factor ‘credit mix’ determines 10 percent of a credit score when making up your credit report. Some examples of different credit types include:
- Retail credit cards;
- Store-specific credit accounts;
- Installment loans;
- Bank credit cards;
- Automobile loans;
- Commercial & residential mortgages;
- Student loans, and more.
Many experts say that this factor is rarely brought into play when calculating your credit score. So even if you don’t have multiple accounts, it’s perfectly okay. Just try to keep a clean record and check your credit report annually. Also, the federal law empowers consumers to get one free credit report per annum from California Department of Consumer Affairs and National Credit Bureaus (Equifax, Experian, and TransUnion).
If you want more information on how to improve credit score or are looking for a proficient and reliable residential & commercial property loan provider in California, then call us on +1 (951) 634-2477 or drop a message at firstname.lastname@example.org.
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