The factor that has the greatest direct effect on your credit score is the amount and type of debt that you have.
However, it is imperative to have some level of debt or a credit history in order to establish your credit score. Lenders will use your credit score to get an idea of whether or not you have a positive record of repaying your debts on time.
In certain cases, having no history of debt can have a negative effect on your credit score in the same way as having a bad credit history would have. There are a number of individual factors that can affect your credit score that you should be aware of.
Consumers should familiarize themselves with these factors in order to maintain a good credit score. It is important to avoid slipping into bad credit as it can cause consumers to be ineligible for loans or credit cards.
In some cases, poor credit scores have affected career opportunities for some consumers because many employers now require that applicants complete a credit check before getting hired.
One of the first steps that consumers with bad credit should take is to find out what is affecting their credit scores so that they can address the issue and improve their financial situation.
Learn About Different Types of Credit Scores
Before you can learn how to improve your credit score, you must know a little bit about the different types of credit scores and their functions. There are a variety of different credit reporting agencies that each provide an array of services. You can receive various credit scores from these agencies based on established industry standards. One of the most common types of credit scores that you may need to establish is called your FICO score.
The FICO credit scores that you can receive are measured on a scale that ranges from 300-850. For a FICO credit report, 300 is the worst score and 850 is the best. Consumers with the best and most preferred FICO scores are generally above 670. Typically, any FICO credit score about 800 is incredibly difficult to attain but can prove to be a huge benefit financially. However, consumers who have a FICO score that is on the lower half of the spectrum could potentially be denied credit altogether. In other situations, a low credit score can cause them to receive monthly premiums that are more expensive than average because credit agency will see them as a higher risk when generating loans.
FICO credit scores are the most common, but another common type of credit score that you may be asked for such as your VantageScore. You should always ask which score will be checked whenever you apply for a new credit line or loan. Fortunately, if your credit score is above 670, you will typically receive acceptable monthly rates on your loans. This is because a higher credit score makes credit agencies believe that you are more likely to pay back loans on time than someone with low credit.
How do credit reporting agencies keep track of my activity?
You may be wondering how agencies are able to keep track of your credit activity, and there are multiple different ways.
For example, whenever you are approved for a credit card, loan or other type of credit, the lender will record your credit activity such as your limits, payments and balances. Lenders will then report this information directly to credit bureaus so that they can maintain an accurate account of your credit reports. In return, credit bureaus collect this information and later sell it to organizations that generate loans or credit lines.
After you have created a loan or opened a line of credit, the bank or lending institution will continue to track all of your activity in regards to the credit they opened with you. This information is continuously reported to the credit agencies. There are certain factors that can be reported to credit agencies that will have a greater impact on your credit score.
Common Factors That Can Affect Your Credit Score
Since your credit score is typically used to track your financial habits, there are a number of factors that can have an impact on your score. Some of these factors may not be your fault, and could be a sign of economic difficulties you faced in the past.
A few of the most common factors that can affect your credit score include:
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Paying Your Bills in a Timely Manner
Taking out a line or credit or being approved for a personal loan comes with the agreement that you will repay your loan. Credit lines and loans usually require minimum payments at specified intervals, typically on a monthly basis. Paying your bills in a timely manner can prevent your credit score from dropping.
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Accounts with Outstanding Balances
When you have an account with an outstanding balance, it signifies that you have debt that you owe to a lender or creditor. It is very common to have outstanding balances from a number of different sources, but mismanaging your balances can damage your credit score. For example, a large number of outstanding balances from a variety of different loans or credit lines can lower your overall credit. Accounts with significant debt may also damage your credit score.
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Number of Credit Card Applications Submitted
Whenever you apply for a new line of credit or for a loan, the lender will be required to perform a credit check. Credit checks can have a minor negative effect on your credit score. However, opening new lines of credit and making timely payments is a good way to start building your credit score back up.
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Number of Credit Accounts Open in Your Name
Although having credit accounts can help you make purchases and build your credit, opening too many lines can make it easy to overspend. Additionally, you will be required to make timely payments on each account, and missing any could further damage your credit score.
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Longevity of Credit Card Debt
Having a credit account for a long period of time and paying off your balance on a regular basis can be a great way to build your credit. Maintaining a high balance on your credit lines for a long period of time can negatively impact your score.
