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What are the Factors Affecting Credit Scores?
Credit Score
The lenders usually depend on a credit score to check how good or bad an individual is in repaying the debt. This score is known as a credit score. A credit score is a key to getting a new loan approved or rejected. When the credit score is above a certain mark, the lenders realize that the capacity of the borrower is enough to pay back a loan.
Therefore, a good credit score helps an individual to get loans on favorable terms while a bad score makes it tough to get a new loan approved.
Factors Affecting Credit Scores
The following 5 factors affect an individual’s credit score directly −
Payment History
Payment history is the most important factor for lenders to check the creditworthiness of an individual. It shows how disciplined the individual has been in repaying the debt.
Even one miss of payment installment can have a big impact on credit history because the lenders want to check the potential power of the borrower in returning the loans. They want to be sure that the borrower will pay the debt in time and hence the history of payment is an important factor in getting a new loan approved.
Amounts of Credit Being Used
The amount of credit that has been utilized is the next factor in the determination of the credit score. It is usually called the credit utilization ratio and it is calculated by dividing the total revolving credit being used by the total amount of revolving credit available for use.
This ratio shows how much credit an individual has been using and offers a bird’s eye view of how much an individual is dependent on non-cash funds. Using more than 30% is considered negative by the creditors at any given instance.
Length of Credit History
The credit score of an account is impacted by the length of credit history which is determined by factoring in the oldest credit history, the newest one, and the average of all other credits being availed by the individual. The more the length of history, the better it is for the lenders to offer new credit.
In other words, the longer a borrower has maintained a good credit repayment standing, the better the chances of repaying the new loan in time. That is why lenders prefer borrowers with longer credit history.
Credit Mix
Credit mix refers to the portfolio of credit accounts held by an individual. The portfolio of accounts may include car loans, student loans, home loans, mortgages, and other types of credit that an individual may have collected as credit.
A right credit mix and regular payment for all accounts of the mix is a good sign for the creditors to categorize the borrower as a potentially good customer. Therefore, the lenders may offer loans at favorable rates to holders of a portfolio of loans.
New Credit Accounts
The number of new credit accounts opened by an individual affects the credit score. Moreover, the inquiries made by the lenders when applications for new loans are made by the borrower also affect the credit score.
If the number of inquiries is high, it is riskier for the lenders to extend a loan to the borrower while a limited number of applications or opening of new accounts is favorable for the customers.
Conclusion
Lenders usually want to play it safe while offering loans to individuals and that is why they want to be sure that an individual will be able to meet the conditions and amounts of the loan installments to pay back in time.
Understanding the customer’s credit habit that is revealed by the factors mentioned above helps the lender determine the creditworthiness of the customer to a large extent. That is why the borrowers must keep these factors in mind while availing and continuing payback of a loan.
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