It's familiar to us that we need a good Credit Score due to a lot of reasons. But what exactly affects our Credit Score? Learning what compromises our Credit Score is a step ahead towards a more convenient lifestyle.
Curious now? There are EXACTLY 5 factors that affect your credit score. When I say exactly, it is literally weighed and proportioned according to the gravity of its effect on your score.
1. The most important factor is your payment history which compromises 35% of your credit score. A 30 day late payment might cause you 50-100 decline in your credit score, depending on the scoring model being used.
2. A high credit usage/utilization, which still carries a bulk of your score at 30%, is the ratio of debt owed to your credit limit. It is simply the amount of credit you've used versus the total credit limit available to you. A higher credit limit lowers your credit utilization. Only revolving balance is the basis here, such as credit card and department store card. Credit limit should be a minimum of $10k to be recognized.
3. Age of your accounts contribute 15% to your credit score. The older the accounts, the better. So when you have finally secured a credit card of your own, see to it that you maintain it for a long time. Closing a credit card account has a big impact on your score not because of it's ratio, but because of its impact to a mixed of credit accounts when closed.
4. Credit inquiry is the most important for your credit's recent history which comprises 10% of your score. It might seem lower than others, but inquiries happen more often than the other factors, and removing them is no easy task.
However, there are two types of inquiries: Hard and Soft Inquiry. Only hard inquiries impact credit scores, such as applying for multiple credit accounts in a short period of time.
5. Credit diversity or being active with your credit-related activities is important with 10% ratio. This is in contrary to keeping your credit score safe. Being dormant for a long time will make evaluation of your application harder for lenders since there is no new available information about your credit from the bureaus.
Being aware of these factors would considerably help you keep track of your credit score. The only question left is how to maintain it.
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