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Factors That Affect Credit Scores

by | Jul 24, 2023 | News

Credit scores serve as numerical representations of an individual’s creditworthiness, enabling lenders to evaluate the risk associated with lending money. Various factors contribute to the determination of a person’s credit score. While the precise significance of each factor may slightly vary across different credit scoring models, the most common elements that impact credit scores are:

1. Payment track record – This is among the most influential aspects affecting credit scores. It reflects how punctual individuals have been in settling their previous credit card bills, loan payments and other financial obligations. Consistently meeting payment deadlines positively influences one’s credit score, whereas late or missed payments can have a detrimental effect.

2. Credit utilization ratio – This pertains to the proportion of credit an individual utilizes in relation to their total available credit limit. Maintaining low balances on your credit cards, ideally below 30% of your overall limit, is generally perceived as favorable for your credit score.

3. Length of credit history – The duration for which an individual has held active credit accounts can impact their credit score. Generally speaking, a longer history of utilizing and managing various forms of credit can be advantageous since it provides more data for assessing one’s financial credibility by relevant bureaus.

4. Different types of credit accounts – It’s beneficial to have a mix of credit accounts, like credit cards, installment loans and retail accounts, as it can positively impact your credit score. However, it’s important to note that this factor isn’t as influential as your payment history and how you utilize your credit.

5. Applying for new credit – If you apply for multiple new credit accounts within a short period of time, it can have a negative effect on your credit score. Each time you make a credit inquiry, there might be a slight decrease in your score. However, the impact tends to lessen over time.

6. Records and marks affecting your reputation – Bankruptcies, tax liens, collections and other negative public records can significantly harm your credit score and remain on your credit report for several years.

7. The age of your credit and average account age – The length of time you’ve had your oldest credit account and the average age of all your accounts can influence your overall credit score. Generally speaking, older accounts tend to have a positive impact on your score.

8. Credit inquiries – When you apply for credit such as loans or new credits cards, the lender may request access to view your detailed financial history through “hard inquiries.” These inquiries can potentially affect your overall score. However, if there are multiple inquiries made within a short period but they’re all for the same type of credit application (e.g. multiple car loan applications), they usually count as just one inquiry.

It is important to mention that credit bureaus utilize different credit scoring models, which can result in slightly varied credit scores for the same person. Moreover, certain factors may carry more significance for individuals depending on their unique credit history. By consistently monitoring your credit report and actively managing your credit, you can effectively uphold or enhance your credit score as time progresses.