Lenders use a number called a credit score to determine how likely a borrower is to default on a loan. Taking a loan for bad credit online might be challenging since different factors affect the approval of a loan. When banks see a candidate with a decent FICO rating, they are reassured that their cash will be repaid on time. In addition, banks will offer you the best credit cards and loans at lower interest rates if your credit score is near 850.
Mastercard organizations, vehicle dealers, and banks are some moneylenders who strictly check the credit rating before finalizing the amount they will provide you. Several factors affect the credit score, and this article will discuss the top 5.
Top 5 Factors that affect your credit scores
Your credit score indicates whether you have a track record of financial stability and responsible credit management. Scores between 300 and 850 are possible.
The major credit reporting agencies use information from your credit file to create this score, also known as a FICO score. The top five factors affecting your credit score are as follows :
1. Payment history
Your payment history makes up 35% of your credit score, making it the most essential factor. It includes information about whether you’ve made your loan payments and credit card payments on time in the past. It also gives information if the payments were made late, how long a payment was overdue and how many times you were late. Future lenders can use this information to predict how likely you are to repay the debt.
Your credit score can be negatively affected by even one missed payment. When considering a new loan, lenders want to ensure you will repay your debt on time.
2. Amounts owed
Another crucial aspect of your credit score is how you use your credit. Divide the total amount of revolving credit you currently use by the total amount of revolving credit limits to get your credit utilization ratio.
This ratio can show how much you rely on non-cash funds by looking at how much of your available credit you are using. Lenders view it negatively when you use more than 30 percent of available credit.
3. Length of credit history
It includes the age of your most experienced credit score, your most recent credit score, and the typical age of your assets. Credit scores usually go up with the length of your credit history. FICO says these three things are taken into account:
● How long have your credit accounts been open
● How long have specific credit accounts been around?
● How long has it been since you last used certain accounts?
For example, if you opened credit cards in 2009, 2014, and 2022, and the current year is 2023, your average credit history is eight years. Your average credit history increases with each new account you open.
4. Credit Mix
People with high credit scores often have various credit accounts, such as mortgages, car loans, student loans, and credit cards. Credit scoring models consider the types of accounts you have and the number of open accounts to determine how well you manage various credit products.
Having a variety of credit accounts that have been managed responsibly demonstrates to lenders that you can handle various financial obligations.
5. New Credit
A high number of accounts or inquiries can mean a higher level of risk, which can lower your credit score. When a lender checks your credit file, an inquiry is placed on your report every time you apply for a new credit card, loan or mortgage. Each time this happens, it lowers your credit score by some points and stays on your credit report for two years (although the impact diminishes over time).
Borrowers who want to meet their financial obligations can quickly get a loan if they have a high credit score. Before applying for any loan, you must carefully consider all the positive and negative factors that affect your credit score. It can help you get better credit terms and work towards a good credit score.
You don’t have to obsess over scoring guidelines to have the score lenders want to see, although your credit score is fundamental to getting loans and the best interest rates. In general, your credit score will increase if you manage it responsibly.