5 Important Factors Influencing Your Credit Score
It is a known fact that a credit score is essential- but in reality there are only five factors involved in calculating it, two of which account for 65% of your total score.
Why it is Important?
Simply put, an individual’s credit score is extremely important.
Credit card companies and banks use credit score to determine if they must or must not grant a loan. A high credit score often is equated with lower rates and hence, lower expenses. Additionally, some states permit landlords and employers to check scores when they are processing rental applications or making hiring decisions.
Fortunately, irrespective of what a person’s credit score is, it can be worked upon and improved in around six months. The first step in improving the score is to know what factors make up a credit score.
The FICO Credit Score has five components: history of payment, sum owed, credit history length, kinds of credit in use and new credit. However, an individual’s payment history and the sum of new credit that they have constitute 35% and 30% respectively of the total credit score.
In other words, the combined effect of an individual’s credit history length, the kinds of credit they use and the sum of new credit that they have is equivalent to only their overall payments history.
Information that is both positive and negative in your credit reports is accounted for in your FICO scores. So in an instance where a history of missed or late payments will make your score lower, it can always be worked on as well.
Payment History– 35%
The biggest and most important part of a person’s score is his or her history of payment. This includes timely payments as well as those that have been made late or missed. It includes factors such as lawsuits, foreclosures, bankruptcies and additional legal information.
Although this is an important component, due to automatic bill paying services, making timely payments has never been simpler.
Sum Owed — 30%
The next component is the total amount payable. This is not only the total sum outstanding but includes the amount of credit consumed against what is available.
This does not mean that you need to add credit just for the sake of it, since accounts with no balances can also cause alarms. Closing an account that is unused and that has a balance which is healthy will not harm a person’s score.
Credit History Length — 15%
The length of credit history considers the length of the first and last accounts, and also the average age of all the accounts. Usually, a longer history indicates at a higher score. But FICO considers the other four components as well when computing a credit score.
Kinds of Credit in Use — 10%
Other than the accounts’ length, the number of total accounts and the factors that make them up- mortgages, car loans, credit card debts and other borrowing instruments- are also considered. Demonstrating a skill to manage a number of various loan types will help increasing your total score.
New Credit — 10%
the total number of recent accounts opened and the number of latest credit checks has equal importance as the kind of credit used. FICO observes there is higher risk when numerous accounts opened during a short time period. It is compounded for individuals who do not have a length credit history.