What Affects Credit Score

A small credit score and a discouraging credit rating, is something that can cause a lot of difficulty in matters pertaining to finance. Well, everybody wants the highest credit score, due to some of its obvious advantages. To get better and better credit scores, you will need to get to know more about credit scores, and the methods that are used to calculate the same. The concept of credit score, came into being post 1970s when loans and credit cards started becoming more and more common. The phenomenon of lending and generation of credit which was becoming more and more prevalent and a need to develop a system to asses creditworthiness was felt. The Fair Issac and Company, which we today popularly call as FICO made a fore way in making the mechanism of credit rating and credit score.

What is a Credit Score?

When people like you and me apply for loans, the lender or the bank undertakes a procedure that is known as 'loan underwriting', where the risk, credit worthiness and the probability of a loan or a credit card bill being defaulted is assessed. The lending party is basically assessing whether you will be able to pay off the required bill or not. A credit score is an important tool that helps them to assess the risk. Apart from that the score also helps the lenders to determine a fair interest or APR rate. The credit score affects almost all your borrowing related finances.

For example, a really bad credit score, means that you may face application rejection or you will have to pay a high interest rate. Similarly, for excellent credit score, the interest rate would be substantially low. In order to implement the wide variety of 'improve credit score tips and guidelines', it is essential to know more about the constituents of the credit score and the factors that affect credit score.

Factors that Affect Credit Score?

FICO makes the formulas and programs for all credit reporting agencies. The names of formulas and actual procedures are different from agency to agency, the basic factors affecting credit score are however the same and the basic formula and its constituents remain the same. The three different models for credit scoring by FICO include, BEACON score used by Equifax, Experian/Fair Isaac Risk Model used by Experian and EMPIRICA used by TransUnion. The companies do not disclose the exact formulas but as per FICO resources, the following are the things that make up a credit score and also tend to affect the score.

• Payment History (35%): The payment history basically consists of all your past accounts and the regularity with which payments have been made. A bad and irregular payment history causes the score to drop down.
• Amounts Owed (30%): The total amount of debts owed to other lenders is also an important consideration in the score calculation. The standard equation is, more the amounts owed, less is the credit score. Hence keep the credit history and current liabilities to the bare minimum.
• Length of Credit History (15%): The length of the credit history is also considered. Rule of the thumb is that longer the history, lesser is the score. Thus avoid unnecessary borrowings and keep them to the bare minimum.
• New Credit (10%): New credit consists of the newly borrowed loans or newly taken up credit cards. Keeping it small always helps, as the lesser the new credit, the better is the credit score.
• Types of Credit Used (10%): The types of credit such as credit cards, types of loans and other credits such as buy now pay later, constitute the score.

This proportion is applied to get a number on the credit core rating sale, which usually extends from 500 to 850 or in some cases, 300 to 750. This credit score scale may differ as per the company and FICO program.

Any drastic or negative change in the aforementioned aspects is going to bring down your score. The exact opposite is applicable for scores, positive things such as of you pay off a loan properly, then the score increases. Apart from these constituent factors other incidents also tend to have an impact on the credit score.

How bankruptcy affects credit score?
Answer: The credit score will go down based upon the number of debts that went bad or, were not repaid. The exact amount differs from case to case. You will also have the bankruptcy record on the credit report for some years and will have to abstain from borrowing for a court mandated time frame.

How foreclosure affects your credit score?
Answer: Foreclosure affects the score in a similar manner as bankruptcy. The score decreases in proportion to the losses of the lender.

How loan modification affects credit score?
Answer: Loan modification may or may not affect the score and will depend upon the losses suffered by the lender. The score will go down by a bit as you credit history and the liabilities will change.

How closing a credit card affects credit score?
Answer: Closing a credit card does not affect the credit score, that is if you leave back no pending balance with the company. If you leave back a balance it adds to the credit history and the total amount owed.

What affects your credit score the most?
Answer: Simple answer, your spending. To cut the long story short, let me recommend you four things, one - Do not borrow when not needed, and Do not spend when not needed, two - never make a late payment and set aside a provision for your credit card bill and loan installments the moment you get your paycheck, three - avoid credit cards as APR is a waste of money there is no urgency to get a new commodity and lastly, think about your finances, you can easily get a really good credit score.

On the whole, managing finances and incomes properly and curbing unnecessary expenditures proves to be an excellent strategy for maintaining flawless credit score.