A credit score is one of the most critical assets that you possess. In today’s day and age, one might even argue that a good credit score is essential to pursue your dreams and avoid financial problems successfully. Nevertheless, many people still do not know what factors affect it. If you are one of them, you came to the right place.
Banks, credit card companies, mortgage dealers, and personal lenders all take a great interest in your financial situation. The primary tool they use to assess whether you are a reliable borrower or not is your credit score. Thus, you should do everything in your power to make it look as good as possible.
Do you want to learn how you can ensure that your credit score is excellent? Here are a few crucial factors that you need to consider:
Payment History
Checking your payment history is a top priority for any lender that you contact. This way, they can ensure that you are a reliable person and can be trusted with their money. However, this practice might also be beneficial for you.
Suppose you visit a personal lender site to see how you can get your credit score. If you decide to create an account and fill out the form, the response you receive may come with various tips. Next, you can use these tips to make your payment history look better and improve your credit score.
This component of your credit score features a few key things:
- Have you paid your bills on time?
- Do you have any lawsuits or public charges against you?
- How many payments have you missed?
- Do you have a debt settlement?
Amounts Owed
The next factor that we need to address is the amounts owed. The main thing that lenders take into consideration here is your credit utilization ratio. They take a closer look at your current financial situation and evaluate how much available credit you have. In this case, if your available credit is small, it shows lenders that you are at a higher risk of defaulting. This, in turn, can lead them to believe that they are better off not borrowing the money in the first place.
Nevertheless, having multiple credit accounts and owing money on them does not automatically make you an unreliable borrower. Just make sure that your payments do not take up too much of your credit, and you should be fine.
Length of Credit History
Every lender wants to know for how long have you been borrowing money. Why? First of all, it can be another telling sign that you are someone they can trust.
For instance, if you have a few credit accounts that you created a decade or two ago and had no problems paying back what you owe, your chances of getting a decent loan deal will increase.
On the other hand, if you have many new accounts full of late payments and other negative items, no lender will come to you running with an excellent offer. Instead, you will struggle to find someone willing to lend you even a small amount of money.
New Credit
Similar to the previous factor, this one also revolves around the time of opening your accounts. Here are some of the questions that you should ask yourself:
- When was the last time I opened a new account?
- How many new accounts have I applied for recently?
- Is the number of my new accounts larger than the number of my old ones?
Your answers to these questions can give you an insight into whether your loan application will be accepted or not. It is because lenders ask the same questions about your financial health when calculating your credit score.
All in all, you need to remember that every time you want to open a new line of credit, lenders make what is called a hard inquiry. This process can significantly decline your credit score, lowering your chances of getting a loan as a consequence.
Credit Mix
The final factor you need to be aware of is the credit mix. Lenders usually check what types of credit you currently have. These can range from mortgage loans and instalment loans to retail accounts and credit cards.
Nonetheless, this is a small component of the overall credit score. So, if you do not have a credit of each type, do not worry. Instead, focus on improving your credit by making your payment history look flawless and keeping your credit utilization ratio low.
Conclusion
Now you know what factors you need to consider if you want to boost your credit score. All you have to do is be aware of them and put in a little more effort to make them look superb. By doing this, you can enjoy a reputation as a reliable borrower and get lower interest rates on your next loan.
Nevertheless, try not to obsess over getting the best numbers possible. Practice good financial habits, pay down your debts in time, and your credit score will shine on its own. If you start making better choices today, they will become second nature to you before you know it. Good luck!
