Having a good credit is of utmost importance due to it’s adverse effect on one’s ability to borrow money as well as the terms of that loan. In this case there has been an increased misconception with regard to what does and does not affect the score. Credit Score is therefore the numbers used by lenders to determine the borrowers creditworthiness since they act as numerical representations in credit report. Having a higher credit score is beneficial in the sense that the lenders concludes that borrower will be able to repay the loan as per the agreed terms. The availability of some lenders with minimum credit score requirements benefits the borrower with higher credit score by mortgage pre-approval. It also helps one get favorable loan terms including low interest rates than those with lower credit score. In determination of one’s credit score there are several factors that are taken into account since there is an impact of debt on credit score.
Payment history. This is the major factor that has the most significant impact on one’s credit score. Before a borrower approval for financing lenders have to consider this factor. Alot of late payments typically affects the overall credit score. It’s good to decrease such late payment cases and avoid carrying credit balances. This tend to have an adverse effect on the credit score with regard to home equity. However it’s possible to recover one’s higher credit score by making quick payments to such debt given that such late payment stays on report for seven years.
Credit utilization. In this case it refers to the ratio that includes amount of debt one have access to and that in current use. Lenders also take into account whether one uses a high percentage of available credit funds given that there is a higher chance of a borrower who frequently owns a lot missing a payment. Lower score is due to higher debt.
Credit history. Credit score tend to be affected by the length of time one has loans and for how long it has been on credit report. It’s good for that specific loan to have a longer time since this affects positively on one’s credit score. Seeing the history of one ability to pay the loan is what lenders want. Therefore having recent entries on the report does not give lenders a chance to see one’s ability to pay off the loans in the long term.
The last factor is new credit. Lenders typically look at the amount of new credit that a borrower has when they are applying for financing. The essence for considering this factor is to give lenders a chance to see how one typically shops for their credit. Multiple application of new financing in a short period of time tends to drop ones credit score.