Credit is an important aspect when it comes to an individual’s personal finances. There are times you need financial assistance to execute projects needing large capital. Financial institutions will offer you this assistance through loans. However, most will assess your credit history before giving you these loans.
Credit history contains data on how you handled previous debts. It’ll show if you defaulted on a payment and the like. This information helps financial institutions assess your risk factor before handing you out a loan. It’s said that if you’re a risky borrower, lenders are less likely to lend you the money.
They’ll get to take a peek at your credit history on your credit report which shows your credit score too. Credit scores mainly range from 300 to 850, though some go up to 950. Here, the higher your credit score, the more desirable you are as a borrower to the eyes of creditors.
As a potential borrower, are you wondering what aspects contribute to your credit score? The following aspects are said to affect your credit score:
1. Current Debts
When looking for financial assistance, having several outstanding debts isn’t ideal. Financial lenders will interpret this as an inability to manage your finances. They’ll conclude you can’t pay them up on time with all the existing financial baggage. How do they assess your debt?
Most will apply to your credit card, a mortgage, a student, or a car loan. They’ll check the remaining balance for you to complete loan payments. On credit cards, they’ll get your credit utilization ratio, which is the difference between your credit card balance and credit limit. The bigger this ratio, the higher of a risk you’re to lenders. It’s always advisable to limit your credit card utilization to 30% or less. Beyond it and you’ll come off as an irresponsible spender.
Any lender will resist lending you money when you already have huge debts. It’d help to minimize your debts as much as possible to improve your credit score.
2. Credit Age
Credit age refers to the period you’ve had your line of credit like a credit card. The focus is on how long ago you got your first line of credit. Why does it even matter, you may ask?
An old credit card shows lenders you have experience handling credit. It’ll positively impact your credit score, making lenders feel confident to lend you money. However, your credit history age will only positively impact your credit score if you previously made timely payments to your credit balances. Most lenders will find this information on your credit tradelines, including when you opened your accounts.
3. Number of Accounts
When looking to avail more funds through limits, you’ll get several credit cards. Yes, you’ll achieve your goal, but what impact does this have on your credit score? In most cases, it’ll negatively affect your credit score. How?
With many cards, you have many debts to pay within a billing cycle. Depending on the amount you’ve spent on each, you’re likely to find it challenging to make payments. You might completely default or end up making late payments. Doing this increases your debt and negatively affects your payment history, aspects which significantly decrease your credit score.
It’d help to have one or two credit cards that you can easily manage to pay within the agreed period. Keep tabs on your credit health too.
4. Payment History
Generally, lenders want assurance that you can pay them off within the agreed period. Your payment history will help them gauge this.
If you’re prone to making payments after the due date, your credit score is likely to decrease. The same will happen if you extend late payments for an extended period. Most lenders will give you a grace period of around a month to clear off your loan. In case of failure, they’ll forward your account to collectors who’ll seek the payments on behalf of your lender. The involvement of a third party to help clear your debt will greatly affect your score, leading to bad credit.
Most lenders will avoid lending you money if you’ve got a poor payment history. They’ll believe you’ll give them a hard time during repayment, making you a high-risk client.
Conclusion
Your credit score is important to your life’s financial aspect. This feature has shown you the factors that impact your credit score. With this information, you can ensure you maintain a high credit score to assist you when the need arises.
