What Factors Affect a Credit Score
Payment history determines 35% of your credit score. In fact, the time you pay your bills affects your credit score more than any other factor. Serious payment issues such as write-offs, collections, bankruptcies, repossession, tax liens, or foreclosure can devastate your credit score, making it nearly impossible to get approved for anything that requires credit.
Your debt level determines 30% of your credit score. Credit score calculations, like your FICO score, look at some key factors related to your debt. The total amount of debt you carry, the ratio of your credit card balance to your credit limit (also called credit utilization), and the ratio of your loan balances to the original loan amount.
- Payment history
Payment history is one of the most important credit score factors. Every time lenders give you a loan, the question that always comes up is whether you are going to pay it off. Nobody wants to lend money to someone who doesn’t pay as agreed, even if you know them personally.
Your payment history represents up to 35% of your credit score. One factor that is also considered in your credit score is the pattern of your late payments. For example, if you delay a payment for 60 or 90 days, it will have more of an effect on your credit score than delaying 30 days, which can significantly lower your credit score by 90 to 110 points. If you wish to remain in good standing, it is best to avoid late payments at all times.
- Duration of credit
How long you’ve kept your credit also affects your credit score. Without a credit history, creditors have no way of knowing if you are responsible for your debts and how long it might take to pay off the debt in full. Your credit history is important as it makes up 15% of your credit score. That’s why it’s always recommended to leave your credit card accounts open even when you’re not using them, as the age of the account will come in handy for your credit score. If you close your older account, you will notice a drop in your credit score. If you have multiple credit cards, you might also want to consider balance transfers.
- Amount you owe
Generally, people with larger debts have trouble repaying them in full. How much you owe and how many creditors you have make up 30% of your credit score. Most importantly, your credit score is affected by your credit utilization. This rate is the ratio of the total balance owed to the total credit limit on all revolving accounts. Broadly speaking, your credit utilization rate measures the percentage of the total amount you have borrowed and how much you would borrow if necessary.
Your credit score is important as it determines whether you are eligible for loans, how much you can borrow, and interest rates. You don’t need to have formal credit training to know what affects your credit score.