If you have a credit card, you must also be aware of what credit score is and how it works. Most people who use credit cards do not know about how these scores are calculated and what factors affect their credit payment history. You must know credit payment history makes up 35% of the FICO score while the amount of credit that you are using also accounts for about 30% of the payment history. In addition to this, the length of credit history, credit mix, and the new credit accounts take up 15% or less of the FICO score which is most commonly used by lenders.
According to a dissertation writing service, the exact impact of each of these factors depends on the credit scoring model that is being used and the way and time for each. You might not know this but there are hundreds of credit scores and the three-digit number that is seen on the credit score varies based on the exact score being used.
Determining credit scoring models have difficult scoring ranges and some factors have an impact on them. Most of us think that they will fall in the same range or credit bank even if the actual number of the score is not the same as the scoring model. The best way to understand this is that if you fall in the excellent range for one credit score, you will be in a similarly high range on a different scoring model.
The Top Factor That Impacts Credit Scores:
Most lenders use the FICO Score for making 90% of their lending decisions. Discussed here are the various factors that impact the models that have an impact on the credit score:
Payment History:
Payment history is very important. It is because the lender will decide if they should give you any more loans or refuse you outright based on your credit history and score that. If you are late with payments or even miss out on a few, it will be recorded in your payment history and the lender will reluctant to give you a loan in the future. Credit scoring models use the same criteria when calculating your scores.
It has been established that a consumer’s debt payment history is the most accurate predictor of whether the consumer will pay back their loans on time in the future. Thus, it is necessary to understand that your payment history is the most essential and impactful factor that can impact your credit score. Another important detail that you must not forget is that late or missed payments stay on your credit report for up to seven years. This means that you will get away with making late payments or missing them even if you repay them in the long run.
However, the good thing about this is that the negative impact on the credit report declines with time and you can build up your credibility by keeping up with the payments timely. Also, you will only be charged a fee for sending in late credit card payment but your credit score will not take a hit as the creditor will not report your late payment to the credit bureau until a full billing cycle has passed. It is only when you are 30 days late with the payment that any effect on the credit scores will take place.
Bill Payments:
When we talk about payment history, it can cover a lot of things. It is essential to understand the most important payments on the credit reports such as any type of loan or credit account including credit, personal loans, auto and other vehicle loans, student loans, and mortgages for a home. You can include your timely utility bill and telecom payments on your credit history. They can give an instant boost to your FICO Score and this works best for people who have a good credit history and no delayed payment issues.
Some Other Factor That Impact Credit Score Greatly:
Along with the payment history, the other most important factors that affect the credit scores to a great extent are:
Credit Utilization:
The amount of available credit that you are using accounts for 30% of your FICO Score. Divide your current credit card balances by the total credit limits across all your cards and you will get the credit utilization rate and using more than 30% of your available credit might affect your credit scores. The best way to do it is to keep the rate low.
Credit History:
It is important to see for how long you have been using credit accounts as it makes up 15% of the FICO Score. If you have been managing your credit account successfully for a long time, it can keep your scores highly. However, opening and closing several new accounts not only affects the scores negatively but also reduces your credit history length. It also increases credit utilization which is not very good.
Credit Mix:
It is all about the different types of credit you carry. This includes revolving and installment credit as they make up 10% of the FICO Score. A good credit mix can play a crucial role in keeping your credit scores good if you manage to manage all the payments on time.
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New Credit:
You might not be able to get new credit if you have opened several credits in a short time and are relatively new to this. Along with this, every time you apply for a loan or credit card account and the lender takes a look at your credit history, it will be recorded on your credit report and this is not looked at favorably. However, this is not a very issue as it lasts only for a few months and you are eligible for new credit if everything goes well.
Right timing matters a lot when it comes to determining the factors that have the greatest impact on credit score. Your payment history is a crucial factor and has the biggest effect on things work out for you. It is important to focus on payment history and keep the other factors in mind that make up credit score to ensure you do not face any trouble and stay clear of mounting debts or bad credit scores.