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Factors Influencing a Person’s Credit Score

2015-04-30 01:09:58

About 90% of consumer lenders worldwide use FICO® Scores in their credit scoring system in order to determine how risky it would be to lend to a person. This scoring system are computed from many different facets of credit data, negative or positive, in a credit report. The three major consumer credit bureaus, Experian, Equifax, and Transunion, collates credit reports and submit those to creditors. Score ranges from 300 (very bad) to 850 (excellent), which can hugely affect your credit standing, as well as the types of loans for which an individual is qualified.



The credit card score is divided into five categories, as outlined below:



Payment History (35%)



All creditors ask this question at the back of their minds when they give money to a person: Will I get my money back? Being the most important factor in credit score, lenders want to know if the person has paid his or her previous credit accounts on time. FICO states a few late payments won’t automatically hurt one’s credit score. However, even one missed payment can dent your credit history, not to mention possible late fees and higher interest rates.



But it does not end there. The most dangerous marks come in the form of public records. Bankruptcies, foreclosures, public judgments, and wage garnishments, among other events, can impact your credit report and reduce credit score drastically.



Amount Owed (35%)



What is the essence of paying on time if you are about to reach a breaking point? This credit score accounts an individual’s credit utilization ratio, which gauges your debt obligation compared to allowed credit limit. But you need not to have a $0 balance on your accounts to get a high score on this one. According to FICO, a low credit utilization ratio is better than high or none at all.



Length of Credit History (15%)



A longer credit history will escalate your score in general. In most cases, those who have been using credit card for a few years know how to handle it responsibly, unlike the ones who are opening a credit card for the first time. In other words, the longer, the better. The best way to obtain a high score here is to leave your accounts open even if you no longer use it.



Types of Credit in Use (10%)



Although it plays a small part in your credit score, FICO will still consider the various types of accounts you have when it comes to evaluating your risk. Accounts include credit cards, installment loans, mortgages, and retail accounts. It is a plus if an individual has credit cards and installment loans with good payment histories.



New Credit (10%)



If a person applies for a new credit account, lenders usually administer a hard inquiry, the act of checking your credit details during the underwriting procedure. Research shows a person opening new, different credit accounts all at once can pose a greater credit risk, especially if he or she has a long credit history. So, as much as possible, minimize the number of times you apply for new lines of credit in a year.



Although FICO has not revealed the precise method for finding out your credit score, we have more or less the overall guidelines for nailing the highest credit score. In essence, one should be responsible enough to pay the amount of money he or she owes, pay on time, and mind debt obligations.