First of all, it becomes rudimentary to get a basic understanding of what a credit score comprises of. When it comes to credit scoring, it can be seen that FICO is one of the most prominent players in the industry that determine the overall credit scores of multiple parties.
Their importance in the United States can be gauged by the fact that as many as 90 percent of lending decisions are made using FICO scores. Having established the credibility of this particular organization, it can be seen that they have listed as many as five factors which directly impact the credit score of a given organization.
They include
- Payment history
- Credit utilization
- Length of credit history
- New credit
- Credit mix.
These factors are the greatest determinants for a credit score.
Payment History
As far as payment history is concerned, it comprises of 35% of the credit score, and therefore, stands to be the most crucial factor in this regard. As suggested by the name itself, it can be seen that payment history can simply be improved by ensuring that the organization is able to make timely payments in order to honor their debts. Be it daily bill payments, or any other obligations that they might have in terms of short-term debt repayments, of financial costs. An organization or an individual can simply improve their payment history by ensuring that they are able to pay their debts and dues on time, and avoid any late payments. Therefore, it is important to ensure that there is sufficient financial planning involved in order to pay all dues and bills on time, and avoid disrupting the credit score of the particular business line.
Credit Utilization
The second determinant that influences the credit score is the total amount owed by the organization. Credit utilization, it is referred to as the percentage of available credit that has been borrowed.
In this regard, there is a need to ensure that the credit utilization limit usage is no more than 30% of the total credit line.
Speaking of this is also an integral part, and it can be seen that it accounts for 30% of the overall credit score of the individual. The overall extent of the credit score is impacted directly by the amount of credit owed. The greater the capacity utilization, greater the chances of a poor credit score.
Credit History
Credit history is also a very important factor. As far as the length of credit history is concerned, the length of time each account has been open and length of time since the account’s most recent action. This is around 15% of the total credit score. A longer credit history will increase the overall score of the company. The older the credit history, the better the score of the organization.
New Credit Accounts
As far as new credit accounts are concerned, it can be seen that applying for new credit scores often backfires for the individual. Therefore, new credit accounts should only be requested when absolutely necessary. During credit repair it’s best to be strategic when opening new credit lines. The idea is the establish good credit payment history. So start with a low limit that fits within your monthly budget comfortably.
CreditMix
As far as credit mix is concerned, it can be referred to as the overall portfolio of credit that has been extended by an individual.
Lenders, and creditors often use credit mixes as a strategy to evaluate the past debt experiences that a person has had, and the overall ability with which these experiences are handled by the debtor. It shows that repaying a wide variety of credit mixes and alternates can show that the buyer is able to handle multiple types of credit. Historical data of multiple credit avenues therefore, plays in favor of the interest of the individual. Hence, in lieu of improving credit score in the longer run, it gets necessary to have alternate lines of credit.
Other Factors that may cause a poor credit score
In exception to these few features which can be used to improve the credit score, it is also important to consider some other factors which can play a pivotal role. For example, hard enquiries, are supposed to be taken care of. Hard inquiries are recorded in the credit file every time a lender requests a credit report. Hard inquires remain in the file for as long as two years, and tend to have a negative impact on the overall credit rating of the company.
In the same manner, cancelling any credit cards because of no usage, or transferring balances to a single credit card might not be the best alternate. This is because of the fact that it will decrease the overall extended credit limit, and hence, the utilization ratio is meant to increase owing to that. Whilst it might be convenient to carry a single credit card every time, yet it is not entirely wise to cancel credit cards or credit options just because of redundancy.
Therefore, it can be seen that credit scores can visibly be improved by paying attention to these factors. Just by focusing on a few of the points outlined here could have a huge impact on your credit score.
