Not understanding what determines credit scores and the five elements that make up your FICO score could have a tremendous negative effect on you getting approved for credit. For example, if you are 30 days late within the first two years of having an account, this could bring your score down by 30 points. In return, you could get denied for a home loan based on that single 30 day late indication. In today’s society, your score is used whenever you apply for credit, so it’s important that you understand how to raise it and maintain it. Monitoring the five areas of your score will let you know which areas need improvement.
What determines credit score – How is my score calculated?
It’s calculated by your payment history, the amount you owe, the length of your credit, what new credit have you applied for, and the type of trade lines you have.
What determines credit score – Payment history
Your paying habits are 35% of your score. If your late payments are recent, it will lower your score more than if you were behind in the past. In addition, a 90-day late indication will severely damage your it over a 30-day mark. In addition, public records like tax liens, judgments, and bankruptcies fall into the same category and could take your score down even further, so make sure you are current with the creditors and always pay your bills on time.
What determines credit score – Amount you owe
The balance on your accounts is 30% of your available credit score, so using all of your credit will worry lenders and hurt your score. The lower your balance, the better your score.
What determines credit score – Length of credit
The amount of time you’ve had your credit makes up 15% of your credit score. The age on your trade lines is very important to lenders because it shows that you have paid your bills on time. Reliability and longevity are good traits for additional credit.
What determines credit score – New credit
This makes up 10% of your score. The FICO model looks at how many accounts you’ve applied for lately, any fresh accounts you have opened. The model looks at time passed since you requested for new credit, and the amount of time since you opened another account. If you open too many accounts in a short period of time, you will look desperate to the lenders, and they don’t like loaning money to needy customers.
What determines credit score – Type of credit you use
This section makes up 10% of your score. FICO wants to see a healthy mix of trade lines like a couple of bank cards, retail store cards, and installment loans like a car, personal or a mortgage loan.
Concluding, your score is very important when it comes to getting approved for credit. The five above factors whether dictate your score drops or increase. Not understanding the make up of the three digit number could result in serious financial problems. So now that you know what determines credit scores, go out there and improve yours today.
