A credit score can tell lenders much about your financial situation and your creditworthiness. While a credit score that falls between 300 and 850 is uncomplicated, the factors that go into the final calculation can be. The higher the score, the more likely you are to repay lenders.
What Factors Into A Credit Score?
Payment history is the most critical element that affects you as it is worth 35% of a total score. It is also a factor that can both negatively and positively affect you since it formulates your bill payment practices. As lenders regularly report to credit bureaus, it is also a factor that adjusts your score regularly. Even a few points can make the difference between a high annual percentage rate and a low one, so watch your payment history.
Another significant factor you need to pay close attention to is your credit utilization rate which accounts for 30% of your total score. This rate is your total credit limit minus your current debt. Lenders like to see a borrower’s score under 30%, so try to cut down on your debt to lower your utilization rate. A lower score also helps you get future offers.
Lenders want to know about credit history because it is a predictor of future consumer behaviors since it provides details on both older and newer accounts. The information tells creditors about your understanding of credit as well as your ability to make payments. It is worth 15% of your total credit score, so start here to raise your score.
It is a benefit to maintain a variety of credit accounts. Lenders want to see credit cards, installment loans, or retail accounts. This information is 10% of your total score, so keep it in mind when trying to decide which types to submit applications. If you do not have any credit, you can start with a personal loan or a retail account to begin to build it up.
The number of credit accounts available to you is worth 10% of your score. Your balances are also part of the account history scoring model. The more accounts you have lower to zero, the better your score will be. It can also fluctuate your score monthly. Accounts that carry over balances will hurt your score. Keep an eye out on your balance.
What Is A Credit Report?
Did you know that you can typically have three credit scores and three credit reports because lenders generally report to only one of the big three companies: Experian, TransUnion, and Equifax. Your credit report contains vital information that documents your consumer behaviors, past credit history, and credit account status
A credit report is not a credit score. It is up to the lender as to which credit reporting agencies they check. Your score and history differentiate based on the information that the creditors submit since no law requires them to submit to all of them.
Your credit report helps lenders verify your status as well as the amount of financing they will apply to your account. Credit reports are also updated in real time, so creditors see a snapshot of your current payment activity. Agencies that request a credit report may decide insurance rates, leasing guidelines, utility deposits, and employment eligibility,
What Else Affects My Credit Report?
While the five components of a credit score set the tone for lenders, there are a few things that can raise or lower your number slightly. Hard credit inquiries and negative consumer information factor into how lenders value your creditworthiness and overall reputation.
Anytime you apply for credit, a lender performs a hard credit inquiry requesting additional information on the applicant. When this action occurs, it generates a notation that alerts lenders. If you apply for things like a house or car, bureaus count multiple inquiries in a short period as one inquiry as it is for one item.
- Negative Consumer Information
Bankruptcies, tax-liens, write-offs, and account settlements are things that lenders consider negative consumer information that affects their decision. Depending on the type of closure, it affects you for years to come. Very few lenders will feel comfortable giving you credit when you did not pay debts. Other issues include:
Did you know that missed or late payments stay in your history for seven years? Even if you have excellent current payment activity, a negative history will affect you for seven years. Seeking reliable credit repair services will help you to overcome this challenge.
People typically file bankruptcy when their debts have grown higher than their assets. There are two types of bankruptcies that affect a borrower’s reputation. Chapter 7 filers will not have to repay any debts, but it will stay on a credit report for ten years.
Chapter 13 filers intend to repay some of the debt owed, but it only stays on a report for seven years. While both are negative, lenders would much rather see a Chapter 13 than a Chapter 7 as it shows you did attempt to clear up your debt in the long-term.
As in-house debts age, they become liabilities that are too expensive to continue to collect actively. A company would rather risk sending an account to a collection agency at a small loss rather than continue to collect on a closed account with a balance
It also frees up employees to handle core company duties. Accounts go to collections after six months of a debtor’s non-payment or non-communication. It remains on your credit report for seven years and will negatively impact your credit
It is not a good sign when creditors see charge-offs in your credit history as it tells them that you failed to pay your past debts. The company eventually will give up because of the collection expense and will write the debt off as an uncollectable loss.
Creditors tend to sell these debts to a collection agency at a rate lower than what a debtor owed. Charge-offs affect the debtor as well since the company and the collection agency have the right to charge fees and interest that continues to grow long-term.
Some creditors secure loans by requesting collateral. When a debtor defaults on such loans, the lender repossesses the property. Whether it is a car which the financing paid for or a bank loan that you used something of value to get, they affect your credit report and reputation since you failed to meet your obligations.
Whether a debtor files for bankruptcy protection or takes advantage of credit repair services, lenders will often settle on balances due them. In a lender’s opinion, a smaller payment is better than no payment at all. Settled accounts still affect you as it negatively reflects on your credit report as you did not pay in full.
Much like repossessions, a foreclosure is for real estate property after borrowers fail to pay their mortgages. As this is typically for high-dollar loans, it will negatively affect you for seven years. It will also most likely prevent you from buying a new home.
- Voluntary Surrender Of Property
If you find that you are unable to pay for a loan, a lender might agree to take back the property which leads to voluntary surrender. It will still end up on a credit report, and you might owe a balance which could go to collections and incur additional expenses.
What Else Should I Know About Credit Calculations?
Even when you are keeping up with your payments and paying more than your minimum amount due, your current consumer behaviors can affect your score negatively. When you close an account, it reduces the amount of credit you have available. As your credit utilization is worth 30% of your score, it can adversely affect your score significantly when reducing your limit. Closing older accounts also factor into the 15% of your score, so think about it before ending it.
If you only apply and use credit cards, it also affects your credit mix score. If you have received car loans in the past or have retail accounts, you will be fine. If not, you can apply to a local or online retailer to diversify your credit mix. It will add some points to your credit score.
When you apply for too many new credit accounts in a short amount of time, it sends a red flag to lenders who see multiple hard inquiries on a credit report. It also tends to signify to creditors that you may have a financial hardship. It also increases the risk level which affects your APR.
If your credit score or history has negative information, credit repair services provide excellent credit repair advice. Out website, Personal Finance Tips, provides additional information on the best credit repair companies that will help you overcome any of these challenges.