A credit score, a three-digit number, is crucial in determining a borrower’s risk level for potential lenders. Various lenders, such as credit card companies, auto dealers, and mortgage bankers, assess your credit score to decide the loan amount and interest rate. Furthermore, insurance companies and landlords may also consider your credit score to evaluate your financial responsibility before issuing insurance policies or renting properties.
The following are the five significant factors influencing your credit score, their impact on credit, and how your credit score affects loan applications.
What Counts Toward Your Score
Your credit score reflects your financial stability and credit management responsibility, ranging from 300 to 850. Major credit agencies compile this score based on your credit file information, with the FICO Score 8 being the most utilized credit score, alongside other scores like VantageScore.
1. Payment History: 35%
Payment history is significant in determining your credit score, showcasing your repayment behavior. Factors considered in this aspect include timely bill payments, late payment durations, account collections, charge-offs, bankruptcies, and the time since the last negative event.
2. Amounts Owed: 30%
The credit utilization ratio, owing amounts on different accounts, and total owed compared to available credit limits are crucial in this aspect.
3. Length of Credit History: 15%
Creditors consider the length of credit history to assess credit usage duration, with longer history benefiting credit scores. Experts recommend keeping old credit card accounts active to maintain a high credit score.
4. New Credit: 10%
Recent accounts opened and hard inquiries within the past year impact your credit score, necessitating caution in opening new lines of credit to avoid score declines.
5. Types of Credit in Use: 10%
Credit mix and the variety of credit accounts held influence your credit score to a lesser extent, emphasizing prudent credit management over account diversity.
What Isn’t in Your Score
Numerous factors, such as marital status, race, and public assistance, do not factor into credit score determinations, emphasizing financial behaviors over demographic or personal information.
Example of Why Lenders Look at Your Debt
Lenders analyze your existing debt obligations to assess your creditworthiness, evaluating potential risk factors like recent credit card account openings that may indicate future financial strain.
Lenders use your credit score to assess your credit risk based on historical inquiries and new credit lines, urging prudent credit behavior and minimal credit applications within short intervals.
What It Means When You Apply for a Loan
Adhering to credit utilization guidelines, timely payments, cautious account openings, and regular credit score monitoring can help in maintaining or improving credit scores for favorable loan approvals.
How can I get my credit report for free?
You can access your free credit report once a year from each of the three major credit bureaus—Equifax, Experian, and TransUnion—by visiting AnnualCreditReport.com.
Do lenders use FICO Score 8?
FICO Score 8 is widely adopted by most lenders, offering a standard measure for credit assessment, along with other versions like FICO Score 9.
Is a 700 FICO 8 Score Good?
A FICO 8 Score of 700 is considered good, positioning individuals for lower interest rates, with scores of 740 or above classified as very good.
The Bottom Line
A credit score significantly influences loan approvals and interest rates, with the FICO Score 8 emphasizing credit utilization, payment history, credit duration, recent credit, and credit mix in its evaluation.