Credit 101: Knowing What Factors Impact Your Credit Score

It is your first time out of your family nest, and you are looking to get on top of your finances. One of the best ways to do that is to keep track of your credit score. A credit score is a numerical representation of an individual’s ability or worthiness to obtain and repay debt. This is score is primarily computed from data collected on an individual from a credit bureau. Credit scores greatly affect an individual’s access to loans and credit packages from financial institutions, which means that if you are like most people and don’t have the free cash to buy a house outright then you’re going to need to borrow money at some point. If your credit gets bad, it means that you are a higher risk to lenders, and some may reject your applications for funding. While you can still find bad credit car loans in Melbourne if you need to, proper management of credit will save you thousands of dollars in interest and fees over time.

Credit scores have numerous applications, all of which are important. When looking to secure a mortgage for your home or a loan for your business, lenders tend to review your credit score to determine if you can pay back the loan. A credit score ranges from 300 to 850 and entirely depends on your debt history and ability to pay on time. Defaulting on your payments or late payments has consequences and could lead to lowering of your credit score.

In England and America, credit is calculated using three credit bureaus: Experian, Equifax, and TransUnion. A credit score ranging from 300 to 499 is considered fair. According to three of the largest credit bureaus in the country, a range of 600 to 700 is good, while 800 to 1000 is said to be excellent. You cannot maintain your credit score if you do not know where you fall. For this, you need to conduct a credit check on yourself. In Australia, there are three main bodies responsible for this Equifax, Experian, and Illion. 

To get a copy of your credit report, you need to provide a form of valid identification. Some of the documents may include driver’s license and or your medical insurance card. With your credit score in hand, you may need to know some of the factors that can greatly influence your general credit score this way. You will be able to maintain a clean record in case you are looking to secure credit in the future. 

Factors Impacting Credit Scores

Payment history

How you service your loans and debts is one of the key factors that contribute to your credit score. Missing even a single payment could negatively affect your credit score. Financial institutions need to confident in your ability to pay back the loan they advance as they consider you for future loans. Your payment history contributes to approximately 35%of your FICO Score, an analysis that is used by most lenders in Australia. 

Debt Weight

How you use your credit as determined by the credit utilization ratio is another thing to worry about. This ratio is calculated by dividing your current total revolving credit by your total revolving credit limits. The ratio paints a picture of how much and how frequently you are using the credit you have. You need to stay within a specific threshold to be able to convince your lenders of your creditworthiness. Most lenders tend to consider a lender who utilizes approximately30%of the credit they have. This ratio contributes to 30%of your overall FICO Score. 

Credit history length

People with a longer credit history tend to have a higher credit score. When computing your credit history, the lenders take into account the age of your oldest credit account, your latest account, and an average of all your existing accounts. The length period of holding your credit accounts constitutes to 15% of your FICO Score when compiling your credit report. 

Credit mix

Over the years, people tend to take on several different credit accounts, for example, car loans, credit cards, student loans, health insurance, mortgages, student loans, etc. Some of the people with top credit scores have a wide range of credit accounts that they manage. When coming up with a credit report, credit scoring models go over the different types of credit accounts under your portfolio and how you are managing them. Managing a wide range of credit accounts effectively is a plus on your side, which contributes to 10% of your FICO Score.

New Credit

Having too many credit accounts or inquiries can raise a red flag negatively affecting your credit score. Opening new credit accounts and the number of hard inquiries lenders make when you apply for credit products contribute to 10% of your FICO Score. 

Having a credit account can also impact your credit score either positively or negatively. This is depending on the type of account that you apply for. There are two types of debts that you need to keep in check if you’re looking to balance your credit score:

Installment credit- this credit account consists of fixed loan amounts that have a deadline of payment through monthly installments. They may include mortgages, student loans, and personal loans.

Revolving credit- this is mainly attached to credit card usage but can also involve equity loans. With these accounts, you are given a credit limit with monthly minimum payments according to your credit use.

To be able to keep a tight leash on your finances, you need to keep track of your expenditure and income constantly. If you are able, you can consult with financial experts on how best to boost your credit score without causing yourself too much strain.