A credit score is a means to determine a person’s creditworthiness based on past credit reports. It ranges from 300-900. A score above 750 is considered good. If you are wondering why it is important to maintain a good credit score, here are the reasons:
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This pretty much gives an insight as to why a good credit score is important. Now, let us take a look at factors affecting your credit score.
1. Payment history: Imagine yourself in the shoes of a lender. The first thing that will cross your mind would be”Will I get back my money?” Isn’t this true? The same intuition is the basis of any lender. Your payment history will give them an understanding on your credit repayment behavior. About 35% of your credit score is determined by your payment history. This component further considers the following factors:
See Also: How to Apply for Credit Cards Online?
2. Debt level: The amount of debt owed determines 30% of your credit score. It will take into account your credit utilization. It is a ratio between your credit card balance and credit limit. If your credit card balances are higher than your credit limits, it will inversely affect your credit score.
3. It also takes into consideration how much of your loan balance you have to be paid out.
4. Higher your debt in terms of credit card debt or unpaid loans, higher is the chance of denial of new loans or new credit cards.
5. Credit history: The age of your credit card account determines 15% of your credit score. It will consider the age of your oldest account as well as the average age of all accounts. If you have an old credit card account with proper payments, it will positively impact your credit score. It is an indication that you are good at handling credit. It also gives lenders a chance to learn about your financial behavior over a long time. Because of this reason, it is often advisable to keep your credit card account open even if you are not using it. Closing an old account or opening several new accounts can result in a decline of the credit card score.
6. Types of credit: The different types of credit in your report determine 10% of your credit score. You could have one or a mix of these: Installment loans, credit cards, mortgages and store accounts. Having an account with each of them will boost your score. However do not open an account just to increase your credit score. It determines only 10% of your score, and a small difference will not destroy your scores.
7. New credit: It will consider how many new accounts you have applied for and when was the last time you opened a new credit line account. Each time you apply for a new credit line, a credit report inquiry will be carried out. These inquiries make up to 10% of your credit score. A few inquiries will not affect your credit score much. But a number of inquiries can cause a decline in your credit score.
Why is it so? People tend to borrow more when they are facing a decline in cash flow. Therefore, credit score determines that a person has a high credit risk, if he/she has opened (or applied) several accounts recently.
As we read about factors affecting credit score, it is beneficial to know the factors that do not affect your credit score. This will give a clarity regarding the topic. These are:
See Also: How to Increase Your Credit Card Limit?
It is very important to maintain a good credit score in order to avail a loan or a credit card. But, do not be over obsessed on having a good credit score. The whole point is to manage your credit responsibly. If you do that, you will observe that your credit score would definitely rise.
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