One of the most powerful numbers that affect your financial life is the credit score. It is what financial institutions and businesses use to gauge your accountability. In the bank, for instance, it is used to decide if you qualify for a loan and the interest rate you will be charged. Similarly, an insurance company uses your credit scores to determine your rate. And when you want to establish a new service with a utility company, guess what they will check first. Do not be surprised even when a potential employer inspects your credit history before offering you a job. That is why it is paramount that you understand how to repair bad credit to make your life easier.
Do you want to know what affects your credit scores? Read on.
- History of credit payment
Any financial institution will want to know how you have been making your payments. This factor influences 35% of the FICO scores. A lender wants to deal with a client who pays their debt on time. While a few instances of late payment may not kill your scores, good credit history outdoes two incidences of late payment. On the other hand, it doesn’t mean that your scores will be perfect if you have never defaulted a credit card payment. Other factors have to be considered as well in the formulation of your FICO scores. There are various accounts which are examined for your credit history namely financial company accounts, retail accounts, mortgage loans, other credit cards, and installment loans.
- Credit inquiries
Every time you apply a credit-based application, your credit score is examined and this will appear on your credit report. Your credit inquiries make 10% of the FICO score. Two or three inquiries may not adversely affect your scores but a number of inquiries made in a short period of time can have negative effects. It is therefore important to make as few applications as possible. The only inquiries that matter are those which have been made in the past one year only.
- Credit mix
The types of credit cards you have are also considered in the calculation of FICO scores, making up to 10% of the overall scores. It is recommended that you open only the credit accounts you intend to use. Credit mix is especially important when your credit report doesn’t contain other factors which determine credit scores. It is okay to have different cards but be sure to manage them in the right manner. Note that closing an account is not a solution to fix bad credit. The best way to repair credit is to manage your credit responsibly.
- Level of debt
This makes up 30% of FICO score. The calculation of the scores put into a count number of elements associated with your debt. Such elements include the ratio of your original loan amount to the remaining balance, credit utilization rate, and the overall amount of debt you owe. A very high amount of debt affects your scores negatively. But as you repay your balances, your scores will definitely improve.
- Age of credit history
This entails how you’ve been using your oldest credit account as well as the average age of all your other accounts. Older credit cards can give you high scores because they represent the experience you have in handling credit. They actually make up 15% of the FICO scores. Opening new credit accounts reduce your credit age and consequently your credit score. For this reason, it is a bad idea to open new accounts simultaneously.
There are those factors that do not affect your credit scores namely employment status, bank balances, income, age, debit card utilization, and marital status.