An individual’s credit score reflects their trustworthiness when it comes to repaying a loan. If you are opting for a loan, any lender will look at your credit score before deciding whether you are eligible and what the interest rate will be. A higher credit score will help individuals assure lenders of their capability to pay back the money. There are several factors which affect a person’s credit score. Take a look at five things affecting your credit score here.
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Payments history:
Your ability to repay your debts is the biggest factor that affects your credit score. If you are late in making payments or miss out on them, your credit score will be negatively impacted. If your credit score falls due to any reason, it can take at least four to six months to bring it back to the previous level.
Credit history:
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This factors in how long your credit accounts have been open, and how long it has been since you used each account. Every time you open a new account, your credit score gets affected. Some experts believe that leaving credit card accounts active even if you do not use them, any more is a good tactic. The account’s history will help boost your credit rating.
Type of credit in use:
While determining your credit score, the types of credit you have- mortgage, instalment loans, credit cards and so on are considered. Maintaining a diverse set of credit accounts responsibly will result in a higher credit score.
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Amount owed:
Lenders take into account your credit utilisation ratio or how much debt you have compared to the credit limits available to you. If your credit utilisation ratio is high, banks will be less confident in your ability to handle more loans.
New credit:
Lenders look at the number of credit accounts you have and when was the last time you opened an account. Each time you apply for a loan, mortgage or credit card, lenders undertake a hard inquiry of your credit file. This lowers your credit score marginally. A hard inquiry stays on your file for two years. Too many hard inquiries in your credit file will cast doubt on your ability to pay back your debts.
Credit scores range between 300 and 900. Any score over 700 is considered to be good.
