5 Important Factors That Directly Impacts Your Credit Score

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A credit score affects your financial life in varying ways. This score determines whether you qualify for credit and whether that credit is given at a low or high interest rate. When renting a home, your credit score may determine the amount you pay as a security deposit. 

Improving your credit score can give you access to high limits on your credit card and make it easier to get approvals for necessary purchases like a home or a car. If you plan to buy a major asset like a car or a house, it’s good to check your score six months in advance.

But don’t despair if your scores are poor. Even if you have bad credit car loans are still attainable. You just need to work towards improving your score.

If you’re keen on bumping up your credit score, you need to be aware of the various factors that impact it directly. Some of them have a more significant impact compared to others. Below are five of them: 

Amount Owed To Creditors 

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The amount you owe lenders is a critical factor that affects your credit score directly. This factor alone accounts for up to 30% of your credit score when heavily indebted. Although it may seem challenging to determine when your debt is too much, lenders have a way of calculating your debt to income ratio and establishing when your debt levels are too high. 

If your debts on several accounts are too high, lenders detect an increased risk of defaulting payments. On the contrary, if you have small credit card debts and a low credit utilization ratio, the direct impact on your credit score would be minimal. 

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History of Debt Payment 

Not paying your debts on time, particularly card bills, can bring your score down quickly. Most credit scoring models consider the bill payment an essential factor, accounting for 35% of the total credit score. Essentially, the main bills considered in your payment history are loans and credit cards. 

Other accounts include student loans, mortgages, car loans, phone bills, lines of credit, phone bills, and credit accounts in stores. Although a single late payment may not affect your score significantly, several of them would. If creditors detect a pattern of getting late for payments, they increase your credit risk, reflecting your score. 

Raising a credit score that drops due to late payments is an uphill task. You can avoid this by paying your bills on time. If you’re unable to make your monthly payment, talk to your creditor early before the payment is due to negotiate for more time to make the payment. 

Credit History Length

The other critical factor that directly impacts your credit score is the duration of your credit history. This factor accounts for 15% of your credit score. Most credit score firms consider how long you’ve been using the different lines of credit available to you. 

This involves checking the number of years that you’ve had debt obligations and the average age of your credit accounts. Generally, credit accounts that have existed for many years help boost scores. It shows that you have a good, longstanding relationship with your creditors.

However, the activities in the account can keep your scores high or cause them to drop. For instance, having a long credit history with a few negative items like late payments can boost your credit score. A short credit history that features timely payments and low debt can also improve your credit score. 

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On the other hand, a credit history, whether short or long, that’s marred by late payments and high amounts of debt would impact negatively on your credit score.

Credit Utilization Ratio 

The credit utilization ratio is another crucial factor that impacts your score directly. This factor accounts for 30% of your total score in credit score computation. Credit utilization refers to a digit that shows the amount of credit you utilize out of your available full credit. 

For example, if your limit for credit card debt is $20000 and you’ve used $5,000, your utilization rate for the card would be 25%. Credit score companies consider all your loans and credit cards when computing your score. They get the totals of what you owe and compare that with your current credit limit. 

Boosting the credit utilization ratio is a fast and easy way of improving credit scores. Most credit score firms prefer 30% credit utilization; exceeding this limit can negatively impact your score. The best scores feature credit utilization rates below 10%.

New Debt 

Any new debt you take will positively or negatively impact your scores. Credit score companies keep tabs on new credit accounts, paying attention to the number of recent credits you applied for and how much time has passed since you opened a new credit account.

During underwriting, lenders conduct hard inquiries to gather credit information on your score every time you apply for new credit. 

Recent credit accounts can impact your credit score negatively because they show lenders that you could be planning to take new debts or are experiencing some cash flow problems. Such accounts are responsible for 10% of your score in most instances. 

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Final Thoughts

Credit score enables lenders to establish the risk level of lending money to borrowers. Mortgage lenders, credit card firms, and car dealers are among lenders that check their customer’s credit scores before deciding on how much to lend borrowers and what interest rate to charge. 

Landlords and insurance firms may also use credit scores to determine the financial responsibility of clients before renting out properties or issuing insurance policies. You can enhance your chances of accessing more credit at lower interest rates by maintaining a good credit score.

And even if you currently have bad credit, there are still ways to improve your score. You can still work towards attaining your dream house or car. Paying attention to the five factors that directly impact your credit score discussed above will enable you to do so with ease.