Financial institutions look at your credit report as well as your credit score to decide if they will lend you money. They also use them to determine how much interest they will charge you to borrow money. However, various factors can affect your credit score, and thus, your credit reports. Let’s look at a few of those factors:
Payment History & Charge-Offs
Payment history that makes up 35% of your credit score is one of the most important factors influencing your credit score. Late payment can lower your credit score while due payment increases your credit score.
Charge-offs significantly impact your credit score because they fall under your payment history. Charge-offs usually happen when you’re more than 120 to 180 days late or you miss a payment on the account. Once the lender reports it to the credit reporting agencies, it will show up as a charge-off status along with the late or missed payments. Similar to late payments, a charged-off account will stay on your credit report for up to 6 years from the date you first missed or made a late payment.
Credit utilization, which determines 30% of your credit score, is the second important factor influencing your credit score. Credit utilization is the amount of credit you’ve used out of the total amount available to you. The lower your credit utilization, the more attractive you are to lenders.
Credit history makes up 15% of your credit score. The 15% is based on how long your accounts have been open and whether they are active. If your credit history is long, then you’re expected to have a higher credit score.
Credit inquiries account for 10% of your overall score. Multiple hard inquiries in a short period could lead lenders and credit card issuers to consider you a higher risk customer, as it suggests you may be short on cash or getting ready to rack up a lot of debt. Generally, credit inquiries have less impact on your credit score.
Credit repair will take effort and time. Your creditors will need to see you have changed your habits and have been rehabilitated. Otherwise, you may have to pay high interest rates or face issues in getting credit in the future.
These are the five weighted factors that can affect your credit scores. Work toward maintaining a good credit score to unlock favorable benefits such as access to loans, savings options, etc.