How your Credit Score is Determined
Your credit rating or FICO score is one of the key factors that the banks and lending companies take into consideration, for establishing the risk of default involved in offering you a specific loan plan. In other words, the creditors employ the use of the applicant’s credit history to determine whether he or she is eligible for a loan or not. Furthermore, your credit or FICO scores are also utilized for establishing the rate of interest that you would be charged in case you are found eligible for the emergency loan, long term or short term loan. Let us have a look at the various factors that are typically considered in order to calculate the credit score of an individual.
The first and most important component of your final credit score is the history of your payment patterns in the past. For example, you will be evaluated for several aspects such as your timely payments, frequency of late payments, foreclosures, charge offs, debt settlements, bankruptcies, liens or suits that might be indicative of your credibility in terms of repaying a debt on time or defaulting on the payments.
Another major aspect of your credit score evaluation is the amount of money that you owe others in form of credit cards or loans. This particular component comprises of the proportion of available credit that you have availed for various purposes. A low available credit balance on your credit card or a recent loan with little repayment history will end up lowering your credit score. On the other hand, a loan that is close to tenure completion will enhance your creditworthiness, improving your eligibility for availing future loans.
Length of Credit History
Although, you might prefer not to take out loans and obtain credit from banks or other lending institutions, it is important for you to have some credit history for the lenders to review in the future when you are in actual need of external financial assistance. Your credit score is greatly influenced by the number of years for which you have been using credit in the past. For instance, an individual with a longer history of making timely payments will have a good overall credit score.
Type of Credit Mix
Having a varied mix of credit accounts such as mortgages, credit cards, store accounts and installment loans is indicative of your capacity to handle timely repayments of a wide range of debts. This implies that a person with a good credit mix will have a better credit score as compared to someone who does not have too many credit lines at the same time.
Recent Credit Activity
An individual, who has opened several fresh credit accounts recently, will almost always have a low credit score, due the fact that his sudden surge in financial activity might be indicative of a severe financial setback or crisis.