Top Surprising Factors That Affect Your Credit Score

 

You may have heard that your credit score is a big factor in your ability to get a mortgage, car loans, and other loan products. But what do you know about the other factors that affect your credit score? Here are top surprising factors that could impact your credit score:

Payment history

Payment history refers to a record of all payments made by an individual or organization towards a specific account or financial obligation over a period of time. This record can include details such as the amount paid, the date of payment, and any outstanding balances.

In the context of credit reporting, payment history is a crucial factor that lenders and credit bureaus use to determine an individual's creditworthiness. A positive payment history, where payments are made on time and in full, can help build a good credit score, while a negative payment history, where payments are missed or made late, can damage a credit score and make it harder to obtain credit in the future.

It is important for individuals and organizations to keep track of their payment history to ensure that they are meeting their financial obligations on time and to avoid any negative impact on their credit score or financial reputation. This can be done by keeping records of payments made, setting up automatic payments, and regularly checking credit reports for accuracy.

Credit utilization

Credit utilization refers to the amount of credit you use compared to the amount of credit available to you. It is usually expressed as a percentage and is an important factor in determining your credit score.

Your credit utilization rate can have a significant impact on your credit score. Generally, the lower your credit utilization rate, the better your credit score will be. This is because a high credit utilization rate can suggest that you are relying too much on credit and may be at risk of overextending yourself financially.

To maintain a good credit utilization rate, it's generally recommended that you keep your credit card balances low and try to pay off your balances in full each month. If you do carry a balance, try to keep it below 30% of your credit limit. This will help you maintain a good credit score and improve your overall financial health.

Mix of credit types

Mix of credit types refers to the variety of credit accounts that an individual has, such as credit cards, mortgages, car loans, and personal loans. Having a mix of credit types is generally considered a positive factor in determining one's credit score. This is because lenders like to see that an individual can handle different types of credit responsibly and consistently make on-time payments.

In addition to the types of credit accounts, the length of credit history, the amount of credit utilized, and the payment history also impact one's credit score. It's important to maintain a good mix of credit types, but it's equally important to use credit responsibly and avoid maxing out credit cards or missing payments. A good mix of credit types can help individuals build and maintain a strong credit history, which can lead to better interest rates and loan terms in the future.

Debt-to-income ratio

The debt-to-income ratio (DTI) is a financial measure that compares an individual's monthly debt payments to their monthly income. It is used by lenders and financial institutions to evaluate a person's ability to manage their debt obligations and repay any new loans or credit they may apply for.

To calculate the DTI, you add up all of your monthly debt payments, including mortgage or rent, car loans, credit card payments, and any other recurring debt obligations, and divide that number by your gross monthly income. This will give you a decimal number, which you can multiply by 100 to get a percentage.

For example, if your total monthly debt payments are $2,000 and your gross monthly income is $6,000, your DTI would be 33% ($2,000/$6,000 x 100).

Lenders typically use a DTI of 43% or less as a benchmark for whether or not someone is considered a good credit risk. If your DTI is higher than 43%, it may be more difficult to get approved for new loans or credit, or you may be offered higher interest rates or less favorable terms.

Credit card balances

Credit card balances refer to the amount of money that a person owes to a credit card company for purchases or cash advances made using their credit card. Credit card balances are subject to interest charges and fees if not paid off in full by the due date specified in the credit card agreement.

It's important to keep track of your credit card balances and make timely payments to avoid accumulating debt and paying high interest charges. If you are struggling to pay off your credit card balances, you may want to consider working with a financial advisor or credit counselor to develop a plan to manage your debt and improve your credit score.

Closing credit accounts

Closing credit accounts can have both positive and negative effects on your credit score and financial situation. Here are some things to consider before you close a credit account:

1.     Impact on credit utilization: One of the main factors that affects your credit score is your credit utilization ratio, which is the amount of credit you have available compared to the amount you're using. If you close a credit account that has a balance, your credit utilization ratio will increase, which can lower your credit score.

2.     Impact on credit history: Another factor that affects your credit score is the length of your credit history. Closing an older credit account can shorten your credit history, which can also lower your credit score.

3.     Fees and penalties: Some credit accounts may have fees or penalties for closing them, so make sure you understand the terms of the account before you close it.

4.     Impact on your credit mix: Having a mix of different types of credit accounts, such as credit cards, loans, and mortgages, can also affect your credit score. Closing a credit account can change your credit mix, which can affect your credit score.

Before closing a credit account, it's important to consider these factors and weigh the pros and cons. If you do decide to close an account, make sure you pay off any balances first and contact the credit card issuer to request the account closure.

Errors on credit report

Errors on a credit report can negatively impact an individual's credit score and ability to obtain credit in the future. Here are some steps that can be taken to correct errors on a credit report:

1.     Obtain a copy of your credit report from one of the three major credit bureaus: Equifax, Experian, or TransUnion. You are entitled to one free credit report from each of these bureaus every year.

2.     Review the credit report carefully and note any errors, such as incorrect personal information, accounts that don't belong to you, or accounts that show incorrect balances or payment history.

3.     File a dispute with the credit bureau(s) that are reporting the error(s). You can typically do this online or by mail. Be sure to include copies of any supporting documentation that backs up your dispute.

4.     The credit bureau(s) must investigate your dispute within 30 days and notify you of the results of their investigation. If they find that there is an error, they must correct it and send you an updated credit report.

5.     If the credit bureau(s) does not resolve the dispute to your satisfaction, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) or consult with a consumer rights attorney.

It's important to note that correcting errors on a credit report can take time, so it's important to be patient and persistent in your efforts. However, it's also important to keep in mind that a good credit score is worth the effort and can make a significant difference in your financial well-being.