Whether you are applying for a loan or trying to take out a second mortgage on your house, you will definitely need to know a thing or two about credit score. It might come as a surprise to you that beyond the financial matters, your credit score can have an impact on your career as well. Many companies now look into potential candidates’ credit scores before they can decide whether to offer them a job or not. Furthermore, a poor credit score can be a deal-breaker for a hesitant landlord who will likely refuse to take you on as a tenant, assuming you won’t be able to pay your rent on time.
In the United States, three main credit bureaus are responsible for issuing credit reports. However, it is not uncommon to find discrepancies between the figures issued by each due to falsified information. It is your responsibility to constantly review your credit score and make sure that your credit information is correct and up to date. To do so, you need to have a clear understanding of the calculation process. To calculate your credit score, you will need information about the below five factors that combine to make up the final figure. So, continue reading on.
Your payment history is perhaps the most important aspect in determining your creditworthiness. This information lets potential lenders understand what kind of a borrower you are and helps them identify the level of risk associated with lending you their money. Creditors consider how many times you defaulted on your payments, how often do you miss a bill’s due date, and the amount of outstanding payment that you currently have. Your late payment information accounts for 35% of your credit score. This should give you an idea about the importance of your payment history and how by doing some simple changes to your payment behavior, you can actually boost your credit score. If you can, always aim to pay your bills once you receive them. More often than not, having a poor credit score is a result of negligence rather than financial capabilities.
The amount you owe is a depiction of your current and future financial stance, which is equally as important as your payment history. How much you currently owe to all of your creditors, including credit card companies, car and house insurance, and other outstanding payments, has a huge impact on your credit score. For a high credit score, this figure should be significantly lower than your aggregate income. According to the credit experts at 3creditscores.net, lenders are more willing to loan money to those who prove that they can live within their means, as it makes them seem like financially responsible individuals. On the other hand, accumulating debt left and right and owing thousands of dollars in whichever capacity will make you seem like a high-risk debtor. Lending institutions are profit-generating establishments after all, so unless lending you money can help them make any, you won’t really have a chance. The amount of money owed makes around 30% of your final credit score, which is not a small portion that you can afford to ignore.
If you want to be judged creditworthy, you need a long enough credit history with lots of data for credit bureaus to review and declare you as such. While this might seem counterintuitive, but it is actually true that the more you use your credit, the more likely you are to have a good credit score. Many people think that the best approach to protecting their credit score is to distance themselves from credit altogether and just let it be. However, it is all about being a responsible debtor who can commit to timely payments and full settlements. Credit history length accounts for 15% of your credit score. Although not as big of a portion as the previous two factors, yet it is still worth dedicating the time and effort to make sure you build a long and healthy credit history.
Holding a variety of accounts other than the basic personal and savings will increase your creditworthiness. Banks and other lending institutions value clients with diversified accounts more than others who hold standard ones. Home loans, retail, and online shopping credit cards are all types of accounts that creditors like to see and can improve your chances of being judged as creditworthy. However, to make sure you are doing this right, consult professional financial advisors to help you understand the types of accounts you can benefit from and can enhance your credit score at the same time. Achieving proper account diversity will help you improve your credit score through the 10% portion of the total figure.
The final 10% of the credit score calculator is based on information about your most recent credit activity. Regardless of your reasons, opening new accounts and applying for new loans in a short period will hurt your credit score. Creditors see such ‘frantic’ financial behavior as alarming and one that calls for a harsh creditworthiness assessment. To avoid falling for this typical mistake, try to spread your financial activities and inquiries over a longer period, otherwise, make sure you at least have a good explanation.
As explained earlier, it is your responsibility to look into the often unmatching credit scores calculated by different credit bureaus. With the above information, you should now have a clear understanding of how to do that. However, as you probably know, calculating your credit score is only part of the equation. What is more important is how you can improve it and become a favorable debtor that creditors can trust and accept to take on. Improving your credit score is worth taking the time to look for new and creative ways to make it happen. Even if you think you don’t need it today, you should make that a priority because you will definitely need it at some point in the future.