A credit score is a number between 300 to 850 which helps your creditors to assess your worth. The credit score is based on some information on your credit report. It’s like a snapshot of your credit situation whenever a lenders request them to decide if you are more likely to pay off your loan and make the payment on time.
People believe in a lot of math about credit scoring. So this article is entirely dedicated to letting you know how and what affects the credit score. And we will also discuss how you can improve your credit score. Follow these 6 major rules to improve your credit score and maintain a healthy credit report.
Your payment history affects your credit score the most. Having a long history of on-time payment can leave a positive effect on your credit score. While having a late payment history can damage your credit score. The effects of missing a payment can last up to 7 years. So if you are just starting out your business then you must make sure you keep a clean record so it is easy to get a loan.
If you don’t make a medical bill or your phone bill on time then your account will be transferred to the collection agency. Once they get your account referred to them, they can register your debt to credit bureaus which will leave a negative impact on your score. The negative information will stay on your credit report for 7 years. But your positive information will stay on your report forever. But if you close your account with positive information on it then it will stay for 10 years and then it will completely disappear from your credit report.
If you go fewer than 30 days without paying your due then you will not be reported to the credit bureaus. But if you go longer than that then you will have to pay late fees and get risk-based repricing and your account and payment history will be reported to the credit bureaus. The longer you go without paying your dues, the bigger the impact will be on your score. They can deduce 60 to 110 points for missing a payment more than 30 days.
When you pay off your loan on time, it shows the lenders that you are willing to pay back your debt. Your payment history can be damaged depending on how much you owe to the banks or lenders. But if you have bad credit, then start to make payment on time. This will help you to reduce the negative impact it had on your credit score.
The credit bureaus also look into how much credit you owe them. Maybe you don’t know but the credit bureaus look into your statement balance. So when you make a full payment for your credit card bill without paying the interest, it would show as debt in your credit report.
The credit bureaus use statement balance to find out the total amount of debt you owe across all your accounts. They also check your utilization rate. A simple formula is used to calculate utilization. Divide statement balance by the available credit.
If you have your total utilization below 20% then you can say you have a good score. Utilization is very important as it works as an indicator to show your lenders whether you have self-restraint or not.
It may sound crazy but if you maxed out all of your credit cards then your lenders will think that you have no disciplined lifestyle. So your credit score will decrease. But when you don’t use all of your credits then it shows that you have a self-discipline and self-restraint.
So ultimately, the key to having a good score means having a lot of available credit on your card and don’t use it entirely.
Credit usage is another important factor which can help you to quickly improve your credit score. The lenders also take into account how much you owe to installment loan, personal loan, mortgage, and student loan. They also take your credit utilization rate into consideration.
The credit utilization means, “the ratio between the total balance you owe and your total credit limit on all your revolving accounts like credit cards”. The credit utilization on different accounts can only make things worse. So when you are paying off your debt, not only you have to keep eye on paying on time but also your credit utilization on individual credit cards. Having a lot of accounts can show your lenders that you are a riskier bet.
If you want to improve your credit score then consider making early payments throughout your billing cycle to maintain a low utilization rate.
Total time period of your credit history:
Another important factor that affects your credit score is how long you have used your accounts. The credit card bureaus take into consideration few factors like the average age of your accounts, whether you have been using them or not, the age of your oldest and newest credit card accounts etc.
So opening a new account will lower the average age of your account which ends up hurting your credit score. But increasing the total time limit can lower your credit utilization rate. Just remember to make on-time payments and add scores to your credit report.
Your old accounts will remain for almost 10 years on your credit report which will increase the average age of your accounts. But once your accounts drop off from your credit reports it will lower the average age of your account and can hurt your credit score. This impact could be severe if the accounts were your older accounts.
If you have any experience with different types of credit like having an installment student loans or revolving credit cards then it can help to improve your credit score. Credit mix can only have a minor impact on improving your credit score. So don’t go taking out loans from banks to improve your credit score and pay thousands in interests. However, if you have always used installment loans then consider opening a credit card and use it for minor cases so that you can easily pay off the loans on time.
Often creditors review your previous credit report and score before granting a new line of credit. This record can stay on your report for up to 2 years. This record is known as “inquiry”. When creditors just check your credit score and prerequisite or pre-qualification then that inquiry is known as a soft inquiry. This type of inquiry doesn’t hurt your credit score.
But when creditors check your credit score before approving a lending then that can hurt your credit score, this type of inquiry is known as “hard inquiry”. Even when you do not qualify to get a loan or a credit card, it can still affect your score. Unless you have other negative marks, a single hard inquiry would not hurt your credit score. You can recover your credit score within a few months.
Hard inquiries can be severe if you if have a few within a short period of time or you are new to credit. But this doesn’t mean you will stop looking for good options. Credit scoring models know that people like to compare multiple student loans or auto loans or mortgages.
Tips to build up your credit score quickly:
- Use your credit card every month but keep the payment to a minimum.
- Keep your utilization rate below 20%.
- Pay off a debt to decrease utilization and increase your available cash.
- Making a payment on time will increase your credit score. If you keep doing it, then soon your credit score will reach 700.
- Ask your service providers like a cable company, phone company to send your payment history to the credit bureau to get a good credit score.
- Instead of worrying about your bad credit, think about more ways to improve your credit score.
Your financial and credit-related actions will contribute to your credit scores. So it’s all in your hand to improve the credit score over time. The main reason for my article is to assist you to make informed choices to improve your credit score.
If you surf the internet, you will find many credit scoring models. All the scoring models are set to figure out how you can improve your credit score. Follow the rules, try to focus on all your credit-related actions and figure out what is not working for you. If you can’t decide yourself then get professional help, consult a financial advisor.
Your credit score is extremely important to get approved for loans and the best interest rates available. The higher the score, the better your chances of landing with the credit you need. But it’s not necessary to obsess over the scoring guidelines. Just manage your credit responsibly and efficiently and your score will definitely shine.