Credit scores are the most important factor that determines the success of your credit application whether it be the Home Loan, Auto Loan, Credit Card or even Utility connection. Commonly, lenders use these scores - and the information within our credit reports - to determine loan rates and credit worthiness of the applicant. Increasingly, employers and landlords are using them to decide whom to hire or rent to. A bad Credit Score or default on couple of credits can have impact for long term on your credit report.
But how do the credit bureaus come up with this number? What determines whether your score is 500 or 850? It's not as complicated or mysterious as you might think. Here's the breakdown of the factors that make up your credit score:
1) Your Payment History - (35%)
This takes into account how well you've paid back all of your loans. Making the credit payments on time will keep this factor healthy. It also takes into consideration any past due loans and how far past due you are on those payments. Most of the lenders give 30 days period for making the payment and if you make the payment in that time,this factor works in your support.
Being more than 60 days past due will hurt your score. The more delayed you are, the more you are denting your credit score.
2) Current Amounts Owed - (30%)
Here, the credit bureaus are looking at not only how much you owe in total, but also the balance on your credit cards in relation to your total credit line as well as the remaining balance on your installment loans in relation to the opening balance. Maxing out credit cards and slowly paying down the balance will hurt you in this category. By many estimates it is assumed that having more than 50% in Credit card Dues than your max limit can have negative impact on your credit.
3) Length of Credit History - (15%)
Credit bureaus and creditors want to see how long you've had loan accounts. While making your payments on time for the first year you've had credit certainly will help, doing so for twenty years carries much more weight. Another important factor is your oldest credit. The longer your credit history is, more confident the lenders will be about their assessment about you. If you are a parent, you should try to start your Childs credit when he is eligible. This will help him to build the credit when he really requires to use it.
4) Recent Search for New Credit - (10%)
Opening accounts frequently especially in the last 12 months can have negative impact on your credit score.
When you're applying for loans, lenders want to know if you've recently opened other loan accounts that could change your ability to repay your outstanding debts. Each time you apply for a new credit account, an inquiry from that lender shows up on your credit report. Too many inquiries in the same timeframe can impact your credit score for up to a year. This shows that you have financial problem and looking for credit.
5) Types of Credit Used - 10%
This category factors in the mix of different credit accounts that you currently have including revolving lines (credit cards or lines of credit), installment loans (auto loans or personal loans), and mortgages.
If you are looking to build a credit history, it may be advisable to take a small loan on your car and pay it on time. This may impact your credit score when you apply but will help to build up your score eventually.
Keep these factors in mind as you manage your credit and loan accounts.
But how do the credit bureaus come up with this number? What determines whether your score is 500 or 850? It's not as complicated or mysterious as you might think. Here's the breakdown of the factors that make up your credit score:
1) Your Payment History - (35%)
This takes into account how well you've paid back all of your loans. Making the credit payments on time will keep this factor healthy. It also takes into consideration any past due loans and how far past due you are on those payments. Most of the lenders give 30 days period for making the payment and if you make the payment in that time,this factor works in your support.
Being more than 60 days past due will hurt your score. The more delayed you are, the more you are denting your credit score.
2) Current Amounts Owed - (30%)
Here, the credit bureaus are looking at not only how much you owe in total, but also the balance on your credit cards in relation to your total credit line as well as the remaining balance on your installment loans in relation to the opening balance. Maxing out credit cards and slowly paying down the balance will hurt you in this category. By many estimates it is assumed that having more than 50% in Credit card Dues than your max limit can have negative impact on your credit.
3) Length of Credit History - (15%)
Credit bureaus and creditors want to see how long you've had loan accounts. While making your payments on time for the first year you've had credit certainly will help, doing so for twenty years carries much more weight. Another important factor is your oldest credit. The longer your credit history is, more confident the lenders will be about their assessment about you. If you are a parent, you should try to start your Childs credit when he is eligible. This will help him to build the credit when he really requires to use it.
4) Recent Search for New Credit - (10%)
Opening accounts frequently especially in the last 12 months can have negative impact on your credit score.
When you're applying for loans, lenders want to know if you've recently opened other loan accounts that could change your ability to repay your outstanding debts. Each time you apply for a new credit account, an inquiry from that lender shows up on your credit report. Too many inquiries in the same timeframe can impact your credit score for up to a year. This shows that you have financial problem and looking for credit.
5) Types of Credit Used - 10%
This category factors in the mix of different credit accounts that you currently have including revolving lines (credit cards or lines of credit), installment loans (auto loans or personal loans), and mortgages.
If you are looking to build a credit history, it may be advisable to take a small loan on your car and pay it on time. This may impact your credit score when you apply but will help to build up your score eventually.
Keep these factors in mind as you manage your credit and loan accounts.
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