5 Significant Factors that Influence Your Credit Score in the US

Each year, over 10,000 Australians go the US to start a new life. Part of life’s journey often includes getting a loan. And before you get that loan, whether it’s a car or personal loan, you may want to be aware of the great significance your credit score plays in getting in better a interest rate and even getting the loan to begin with.

Your credit score is the number that lenders and creditors use to gauge your risk as a borrower. Credit card companies, mortgage bankers, and auto dealers are the three bigwigs of lending who evaluate your credit score before deciding whether or not to approve your loan application and much interest rate they’re going to charge you.

As the US debt Stats burgeon, there are certain sectors that starts to impose stringent requirements when it comes to accepting applicants. It is evident to employers, landlords, and insurance companies who take a peek at your credit score to find out how responsible (or reckless) you are when it comes to money before they will offer you a job,  renting you out an apartment, or issue you an insurance policy.

Yes, your credit score is that important. But what exactly is a credit score? You may ask.

What is a Credit Score?

A credit score, in its most generic term, is a statistical number based on credit history that assesses the creditworthiness of a consumer. Lenders use it to rate your probability to repay debts.

It typically ranges between 300 to 850. The rule of thumb is that the higher your credit score, the more financially trustworthy you are. Otherwise, you’ll be labelled as a high-risk borrower if you have a less-than-desirable credit score.

Your credit score is calculated through these five different factors.

Payment History

Your payment history makes up for 35% of your total credit score. As a matter of fact, your timeliness in paying bills will profoundly affect your credit score more than any other metric.

Delinquent payment issues such as collections, charge-offs, repossession, tax liens, bankruptcy, or foreclosure can take a severe toll on your credit score. For this reason, it becomes almost impossible to get approved for anything that requires a stellar credit, especially loans.

You need to make on-time payments every month to boost the health of your credit score and increase your chances of getting approved on applications whose requirements involve an excellent credit score.

Total Amount of Debt

The total amount of your debts takes 30% of your credit score. Calculating it involves evaluating some few essential factors regarding your debt. Such factors are the credit utilisation ratio or the ratio of your credit card balances to your credit limit, the relation of your loan balances to the original loan amount, and the amount of overall debt you carry.

As a rule, you need to maintain your credit card utilisation within 30% or less of your card’s available limit. Having too much debt or high balances can greatly affect your credit score. Fortunately, it’s easy to fix. All you need to do is pay off all remaining balances.

Credit History Age

The age of your credit history accounts 15% of your total credit score. It considers both the average age of all your accounts and the age of your oldest account. It’s ideal for your credit score to have an “older credit age” as it shows that you’re already experienced in handling and managing credit.

Moreover, closing existing accounts or opening new accounts minimises your average credit age. As such, it will not be a good idea to open multiple new accounts simultaneously.

Number of Credit Inquiries

Inquiries consume 10% of your credit score. An inquiry is placed on your credit report that shows you’ve made a credit-based application whenever you submit an application that demands a credit check.

Making at least one or two inquiries don’t make a big difference, but several inquiries do. It’s particularly visible within a short period and may cost you several points off to your score. With that, it’s crucial to keep your applications to a minimum to keep your credit score in good shape.

The good thing is that only those inquiries made within the last 12 months will be factored into your credit score. Inquiries will completely vanish from your credit report after two years. Take heed also that checking your own credit report will result in a so-called “soft” inquiry, but it doesn’t affect your credit score.

Credit Types in Use

It makes up the remaining 10% of your credit score. The final metric to consider for determining your credit score is whether or not you’re using different types of credit such as store accounts, credit cards, mortgages, and instalment loans. The number of accounts you have will also be taken into consideration.

You don’t need to worry if you don’t have accounts in each of these categories. You don’t have to open new accounts too just to increase your mix of credit types.

Factors that Don’t Affect Your Credit Score

While there are important metrics that influence your credit score, there are some factors too that most borrowers commonly thought will affect their credit scores. However, they don’t, or at least not directly.

• Age
• Marital status
• Salary
• Address
• Race, national origin, religion, colour
• Occupation, employer, an employment history (though other scores and lenders may consider it)
• Receipt of public assistance
• Family or child support obligations
• Participation in credit counselling programs
• Any information not found in your credit report

Takeaway

Your credit score is quite important in getting approved for loans and obtaining the best interest rates. However, you don’t need to torment yourself about the scoring guidelines just to achieve the kind of score that lenders want. Generally, if you will responsibly manage your credit, your score will shine through.