Everyone knows that your credit score is important. Any time you need a car or mortgage loan, line of credit, or any other financial instrument, your credit score will be used by lenders to determine the rate you get or whether you qualify or not at all. Insurance companies, landlords, and even some employers may even look at your credit score to see how financially responsible you are before hiring you, allowing you to sign a lease agreement, or issuing you an insurance policy.
As your credit score (or FICO score as it is sometimes called) is so integral to your finances, it is important to check regularly. Unfortunately, even if you know your particular numbered score, few people understand what their credit score really means. In order to better understand what a credit score is used for, it helps to understand the five key factors that affect your personal credit score. The following are the top five factors that go into calculating your score.
Your Payment History
The most important factor that affects your credit score is your history of paying your debts. Accounting for around 35 percent of your score, your payment history gives creditors an idea of how well you have done paying off your bills in the past, which allows them to predict how you will do in the future. If you have late payments, missed payments, charge-offs, collections, judgments, liens, foreclosures or bankruptcies, your score will go down. The longer you stay current, though, the less a bad payment will affect your score.
Your Current Debt
About 30 percent of your score is calculated by your current total accounts owed. Some debt is good here, but too much can hurt your score. Generally, the amount of “available credit” determines this part of the score, that is, the amount of total credit available to you versus what you currently owe. If you are close to maxing out a few credit cards, this score will go down. On the other hand, improving this score is easily done by paying down some debts.
Length of Your Credit History
Coming in at around 15 percent of your credit score, is how long you have had credit available to you. Essentially, it measures your track record of having credit accounts and managing them well over time. For this reason, it is good to keep your oldest credit card open even if you stop using it. A long history shows you have probably weathered significant life events without missing payments.
Any New Credit Applications
Every time you apply for credit an inquiry will post to your credit report showing that you are actively searching for credit. If you have made inquiries in a short period of time, this can indicate that you have a “need” for money or that other creditors have turned you down, which creditors interpret as a risk factor. The impact of these inquiries diminishes over time, and this still only accounts for 10 percent of your score.
Your Credit Mix
The type of credit you have accounts for the last 10 percent of your score. Generally creditors prefer to see a healthy mix of credit instruments, such as a mortgages, car loans, and credit cards. Lenders prefer to see both installment loans, such as car loans where a fixed amount of credit is given out total, and revolving credits, such as credit cards, where you are loaned more money once you pay off past debts. If you only have one kind of credit or credit that all comes from one lender, this score tends to go down.
These factors significantly affect your credit score and ultimately whether you will have more access to credit down the road. It is important to look at your own credit history and score to find out which of these factors may be having an impact on lowering your score from the top level possible. Once you figure out what factors are helping and hurting your score, you will be able to take action and improve it.
If you have questions about improving your credit after bankruptcy or you are wondering if filing for bankruptcy is a viable option for your financial circumstances, contact the Ohio bankruptcy lawyers at Luftman, Heck & Associates for a free consultation. We are available 24/7 when you call (216) 586-6600.