Working as a self-employed business owner or an independent contractor can have enormous advantages. The…
Your credit score is a number that can determine your eligibility for a loan. That number will also have an impact on the interest you pay on a loan. Contrary to popular belief, credit bureaus don’t make lending decisions; they provide credit reports to the lenders that make the decision. There are three main credit bureaus: Experian, Equifax, and TransUnion. Each bureau collects personal financial data from lenders and other financial intuitions, but not all lenders provide information to all the credit bureaus. So, you could have different credit scores at different bureaus. But how do credit referencing agencies calculate your credit score? If you understand what determines your credit rating, you can take steps to improve it. Here are the factors that credit bureaus use to calculate your credit score.
1. Late Payments
Your payment history is the biggest factor that influences your credit score. Lenders and other providers of credit report your payment history to the credit bureaus every month. Your payment history includes loans, mortgage, and store card repayments. It also includes the payment of utility bills. Paying a single utility bill late is unlikely to affect your credit score. Paying bills late many times, though, will damage your credit score. Missing a loan repayment or paying it late is more likely to affect to your credit rating than paying a bill late. Your payment history accounts for approximately 35% of your credit score.
2. Credit Utilization
How much you have borrowed accounts for 30% of your credit score. The credit bureaus assess your use of credit by looking at how much of your available credit you have used. This is called your credit utilization. If you have available credit that you have not used, it will improve your credit score. It is best, if you can, to keep your credit utilization to 30% or less. Credit utilization makes up 30% of your credit score.
3. The Mix of Types of Credit
The range of different types of credit that you use also affects your credit score. The better the mix of the kinds of credit you have, the better your credit score will be. There are two main types of credit that credit agencies consider in the mix: revolving credit and installment credit. Revolving credit is the type of credit that you have on credit cards and store cards. Installment credit is the type of credit provided by car loans and mortgages. The mix of credit types accounts for 10% of your credit rating.
4. Credit Age
Credit bureaus consider the length of time you have had credit facilities. This helps them determine how well you have managed your credit over time. A credit card that you have managed well for many years will improve your credit score. Credit agencies look at the average age of your credit. So, a lot of credit taken out recently will lower your credit score. But, if you manage that debt well, your credit score will recover in the future. The age of your credit accounts contributes 15% towards your credit score.
5. The volume of Credit Inquiries
The final 10% of your credit score comes from the volume of credit inquiries made against your name. There are two types of credit inquiries. These are hard credit inquiries and soft credit inquiries. Hard inquiries are those made by lenders as part of their decision-making process. Hard credit inquiries have a negative impact on your credit score. Soft inquiries, when you check your own credit score, for example, do not affect your credit score.
The above are the factors that affect your credit score. You can apply for a free copy of your credit report from each of the agencies once a year. It’s a good idea to take advantage of this and check the details recorded against your name. If there are any mistakes on your credit report, you can dispute the erroneous entries and have them removed. It’s another job to do every year, but it doesn’t take too long for most people to do. It’s much better than finding that you are unable to get credit or paying more for your credit than you need to.