What factors are affected by your credit scores? What factors affect a credit rating? What are factors that determine
your credit score? How are credit scores calculated? These are all questions we will answer below.
There are numerous factors that have small and large impacts on credit scores. If people aren’t careful, they could end up paying a hefty price after their credit score dips. This could pose as a huge problem especially you want to apply for a loan on a house or a dream car.
The difference between higher rates would be thousands to dollars to tens of thousands of dollars per year! Imagine this over the lifetime of a 30-year mortgage loan. The difference between 1 or 2% could be huge you thousands in unnecessary interest payments. What most people don’t know is: credit score isn’t the only factor that affects interest rates. There are many other factors such as growth potential, property risk, type of loan, occupations of the loaner and the amount of money needed for the loan.
Why Lenders Consider Factors Affecting Your Credit Score
These factors play a huge part for banks, lenders, merchants, and employers when giving you a
loan. It is obvious if you have a good occupation, lenders would be glad to give you a reasonable interest
rate. In other cases if lenders forecast a property that has high growth potential or low risk of default,
they will gladly loan you the money.
Yet besides receiving a certain interesting rate on a loan, credit scores are also used for your
insurance scores. This can be quit alarming to many people. How can credit scores affect your insurance
score when the two have no relations with each other? Many insurance companies believe that a
person who has a lower credit score will have a higher probability of filing for insurance claims. The low
scores show the insurance company you are unreliable and perhaps might not be able to pay the higher
insurance rate after an accident. Even though many states have been passing laws to restrict this
practice, insurance companies all around the United States still use credit scores as a deciding factor
when giving you a insurance score. The lower your credit score, the most money you could be paying
not only for your mortgage interest payments but also for yearly insurance payments.
Don’t be alarmed! There are ways to watch out for your credit score. The first step is realizing what your
credit score is comprised of.
The Five Factors That Affect Credit Score
35% of the score is made up of payment history. This can be obvious because the lender wants to know
your ability to pay back your loans on time. A score can be severely negatively affected if there are
notices sent out for collection or if you have filed for any bankruptcies. A payment that is sent in late
recently will have a larger effect that a payment that was sent in late several years beforehand.
15% of the score is based upon the length that you have had credit for. The longer you have had an
established credit line for, the more positive your score is. The lender wants to know more information
about your past history in order more accurately predict your future payments. Therefore it is never too
early to establish a credit line.
30% of the score is based on the debt that is currently outstanding. Often credit lines come with limits
and owning too much money will negatively affect your credit score. In this case, you will probably think
that opening more credit cards will increase your credit limit right? Wrong! The more cards an individual
has, the more risk you will be at especially if the cards are all close to their limits. The general rule of
thumb is to keep credit card balances at around 25% or less.
10% is based on the different type of credits you currently have active. The most risky the types of
credit, the lower your credit score will be. This includes but is not limited to installment loans.
10% is based on the opening of new credit. Opening too many new credit accounts in a short period
of time will have a negative effect on your credit score. Hard inquiries on your credit will also penalize
your credit score. A hard inquiry is when you give permission to the lenders to look at your credit score
and potentially provide a new credit account.
Watching the Factors that Affect Credit Score
Watching out what your score is comprised of can help you know what to watch out for in the future.
Some factors have a larger weight than others and therefore have a bigger impact on your credit score.
By constantly keeping track of your credit score, you can not only save money on loans but also save
money when paying for insurance!