WHAT DO AFFECT YOUR CREDIT SCORE?

In my recent article, we know about the importance of credit report and credit score? if you still didn't read my article, Just have a look here.

The importance of credit score: A credit score is a number that lenders use to determine the risk of loaning money to a given borrower. Banks , Credit card companies, auto dealers and mortgage bankers are four common examples of types of lenders that will check your credit score before deciding how much they are willing to lend you and at what interest rate. Insurance companies, landlords and employers may also look at your credit score to see how financially responsible you are before issuing an insurance policy, renting out an apartment or giving you a job.

In this article, we'll explore the most important things that affect your score: what they are; how they affect your credit; and what it all means when you apply for a loan.

What Counts Towards Your Score

Your credit score shows whether you have a history of financial stability and responsible credit management. It can range from 300 to 900, but the higher the score, the better. Based on the information in your credit file, credit agencies compile these scores, also known as credit scores for the system the four major bureaus (Experian, Equifax, TransUnion and CRIF Highmark) use. Each agency will report a slightly different score, but they should all paint a similar picture of your credit history. Here are the elements that make up your score and how much weight each aspect carries.

Payment History – 35%

The most important component of your credit score looks at whether you can be trusted to repay funds that are lent to you. This component of your score considers the following factors:

Have you paid your bills or EMIs on time for each account on your credit report? Paying late has a negative effect on your score.

If you've paid late, how late were you – 30 days, 60 days or 90+ days? The later you are, the worse it is for your score.

Missed payments — Even if you start paying again right away, the fact that you skipped a payment at all looks bad on your credit report. Late or missed payments remain on credit reports for up to seven years from the original delinquency date

Have any of your accounts gone to collections? This is a red flag to potential lenders that you might not pay them back.

Do you have any charge offs, debt settlements, bankruptcies, foreclosures, law suits, wage garnishments or attachments, liens or public judgments against you? These items of public record constitute the most dangerous marks to have on your credit report from a lender's perspective.

Charge-off : When a creditor charges off a debt, it means they’ve basically decided they won’t be able to get the money you owe, and wrote your account off as a loss. The charged off account is closed for any future use and the creditor may continue to report the past due amount and balance owed. Most lenders will also sell these charged off accounts to a collection agency.

Collections : When a creditor feels they can no longer recoup a debt, they may ask a collection agency to try to get you to pay. Or, they may sell the debt to a collection agency. Either way, collections are a type of negative information that stays on credit reports for seven years.

Settled accounts : A creditor may agree to accept less than the total amount you owe, in which case your debt is considered settled. However, because you didn’t repay the debt as originally agreed, settled accounts are still considered to be negative information on credit reports.

Repossession : When a creditor reclaims collateral for a secured loan, such as the vehicle you purchased with an auto loan, the repossession appears on credit reports. A repossession tells potential lenders you failed to repay an important debt as agreed.

Voluntary Surrender : When a lender agrees to take a vehicle back at your request, your voluntary surrender will appear on your credit report as a derogatory item. If there is a balance remaining from the surrender, and you fail to pay that amount, then that debt could be turned over to a collection agency.

Foreclosure : The home loan equivalent to repossession, foreclosure means you haven’t paid your mortgage as agreed and the mortgage lender takes possession of your house. Foreclosures remain on credit reports for seven years.

Bankruptcy : When you’re no longer able to manage all your debt, you may declare bankruptcy. When you file Chapter 7 bankruptcy, none of the debt included in the filing gets repaid, so the notation of the bankruptcy will remain on your credit report for 10 years. If you file Chapter 13, you’ll repay a portion of the total debt you owe, so the information will cycle off your credit report in just seven years.

The time since the last negative event and the frequency of missed payments affect the credit score deduction. For example, someone who missed several credit card payments five years ago will be seen as less of a risk than a person who missed one big payment this year.

Length of Credit History – 15%

Your credit score also takes into account how long you have been using credit. For how many years have you had obligations? How old is your oldest account, and what is the average age of all your accounts?

A long credit history is helpful (if it's not marred by late payments and other negative items), but a short history can be fine, too, as long as you've made your payments on time and don't owe too much.

This is why personal finance experts always recommend leaving credit card accounts open, even if you don’t use them anymore. The account’s age by itself will help boost your score. Close your oldest account and you could see your overall score decline.

New Credit – 10%

Your credit score considers how many new accounts you have. It looks at how many new accounts you have applied for recently and when the last time you opened a new account was.

Whenever you apply for a new line of credit, lenders typically do a hard inquiry (also called a hard pull), which is the process of checking your credit information during the underwriting procedure; this is different from a soft inquiry, such as when you retrieve your own credit information.

Hard pulls can cause a small, temporary decline in your credit score. Why? The score assumes that if you've opened several new accounts recently (and the percentage of new accounts relative to the total number, you could be a greater credit risk; people tend to do so when they are experiencing cash flow problems or planning to take on lots of new debt.

For example, when you apply for a mortgage, the lender will look at your total existing monthly debt obligations as part of determining how much mortgage you can afford. If you have recently opened several new credit card accounts, this might indicate that you are planning to go on a spending spree in the near future, meaning that you might not be able to afford the monthly mortgage payment the lender has estimated you are capable of making. Lenders can't determine what to lend you based on something you might do, but they can use your credit score to gauge how much of a credit risk you might be.

Credit scores only take into account your history of hard inquiries and new lines of credit for the past 12 months, so try to minimize how many times you apply for and open new lines of credit within a year. However, rate-shopping and multiple inquiries related to auto and mortgage lenders will generally only be counted as a single inquiry, since the assumption is that consumers are rate-shopping – not planning to buy multiple cars or homes. Even so, keeping the search under 30 days can help you avoid dings to your score.

Types of Credit In Use – 10%

The credit bureau's formula considers in determining your credit score is whether you have a mix of different types of credit, such as credit cards, store accounts, installment loans and mortgages. It also looks at how many total accounts you have. Since this is a small component of your score, don't worry if you don't have accounts in each of these categories, and don't open new accounts just to increase your mix of credit types. If you have only credit cards and no other types of loans, that lack of credit diversity in your mix may be a negative factor in credit scoring.

Inquiries - 10%

Whenever someone else gets your credit report -- a lender, landlord, or insurer, for example -- an inquiry is recorded on your credit report. A large number of recent inquiries may negatively impact your score. Your new credit accounts and inquiries generally make up about 10% of your score. 

Accounts in use - 10 %

The presence of too many open accounts can have a negative impact on your score, whether you're using the accounts or not. This activity usually makes up approximately 10% of your score. Opening multiple new credit accounts in a short period of time can affect your credit scores in multiple ways. It may generate a concerning number of hard inquiries associated with multiple credit applications, indicating that you may be potentially taking on more debt than what you could manage. 

Credit utilization rate - 10%

The total amount of credit you have available, based on credit card limits, compared to the amount of credit you’re actually using (credit card balances) is also a common credit score factor. A low credit utilization ratio indicates your ability to manage credit well, and many lenders like to see ratios of 30% or less. Closing a credit account reduces the total amount of credit you have available, which can affect your credit utilization ratio. It can also affect your credit history if the account you close happens to be the oldest one on your credit report. 

Let me know your experiences with credit score.