Five Factors that Affect Your Credit Score
Your credit score is a three digit number that financial institutions use to evaluate how likely you are to pay off your debts. When you apply for a credit card, mortgage, car loan, student loan or any other line of credit, lenders use this number to determine how much they’re willing to lend you and at what interest rate.
There are five factors that affect credit score, and knowing what they are can help you build your rating or repair bad credit. Here’s what they include:
1. Payment History – 35 percent
This is the most important factor when calculating a credit score. It determines the total risk involved in lending you the requested amount, and how likely you are to repay it overtime. Lenders consider the following components when they look at your payment history:
- Do you pay your bills on time for each of your accounts? Any late bills will lower your credit score.
- If you paid your bills late, how late were you? One month? Two months? More than three months? Your score drops the later your debts are paid off.
- Were any of your accounts sent to collections? This is a red flag for lenders.
- Did you have any debt settlements, foreclosures, bankruptcies, charge offs or judgments against you? These will lead to a huge drop off in your credit score.
2. How Much You Owe – 30 percent
This is the second largest factor when figuring out a credit score, and it includes the following components:
- Out of the total credit available, how much did you use? Less is usually more, but owing a little credit can show you’re financially responsible and capable of paying your debts.
- The amount you owe for each account-car loans, credit cards, mortgages, etc. Lenders like to see a mix of credit that you handle responsibly.
- How much do you owe in total, and how does that compare to the original installment? Less is always better.
3. The Length of Your Credit History-15 percent
Your final score takes the length of time you’ve been using credit into account. Unless you have negative items in your credit report, a long history is usually helpful. A short history is fine as well, as long as you pay your bills on time and don’t owe too much debt.
4. New Accounts-10 percent
Creditors look at how many accounts you’ve applied for lately and the last time you set up a new one. If lenders see that you’ve opened several accounts, they might see you as a greater risk. People who have money problems or are taking on more debt usually open up more accounts, and may not be able to pay off the amount they’re requesting.
5. Lines of Credit in Use-10 percent
The last component that goes into your credit score is the type of credit you have in use and how many accounts you have. Lenders like to see a mix of credit from mortgages, credit cards, store accounts, student loans, etc. This is a very small factor in your credit score, so you don’t necessarily have to worry if you have accounts in these categories.
Questions about Your Credit Score? Let’s Talk!
If you’re applying for a car loan or any kind of credit, Peake Chrysler Dodge Jeep RAM Fiat would be happy to break down your credit score. Understanding your credit score can be confusing, but we’ll help you figure out the loans you’re eligible for before financing your next car.
Contact us online and one of our financial consultants will get back to you shortly. Otherwise, you can call (877) 270-4862 to speak with a representative from Peake Chrysler Dodge Jeep RAM Fiat.