Five Things That Affect Your Credit Score

In the modern world, a consumer’s credit score is the key to a financially successful life. However, the underwriting process is so complicated that many people have no idea what factors affect their overall rating. To get a better understanding of the things that lenders look at when considering you for a loan, learn about the following five influencers that contribute to your credit score.

NOTE: Your final credit score is determined by calculating the average of your three scores as they are rendered by the major credit reporting bureaus (Experian, Equifax and TransUnion).

1. Payment Habits

Much of what gets shown on your credit report deals with the way in which you repay loans and lines of credit. If you’re frequently late on payments or ask for/use extensions often, it’s likely that your credit score isn’t as high as it could be. Additionally, paying only the minimum balance can affect your rating as well.

PRO TIP: Always make your payments on or before the due date and try to pay more than the minimum amount due.

2. Debt-to-Income Ratio

Lenders and creditors like to look at your personal and/or business finances to determine the likelihood of you successfully meeting the terms of the agreement. So, if you are deep in debt but don’t have the income to back it up, most applications will be denied. Pay down your debts and increase your income to present better to potential lenders.

PRO TIP: Be sure to list all sources of income when applying for a line of credit, including alimony, child support and personal monies owed.

3. Hard Inquiries

Did you know that the simple act of applying for a line of credit can significantly reduce your credit score? Known as “hard inquiries,” or hard pulls, certain activities can become listed on your report and then seen by lenders as acts of financial desperation. Just six inquiries over the course of six months can reduce your score by as much as 50 points.

PRO TIP: Some loan applications won’t create a hard inquiry on your credit report. For example, searching for a car or home loan typically renders only one major inquiry and is commonly viewed as harmless “rate shopping.”

4. Divorce and Civil Suits

Certain civilian events and judgments can also have a negative effect on your credit score. If you’re going through or are recently divorced, expect your rating to take a temporary nose-dive. Some civil suits will drop your numbers as well, especially if you end up owing money to someone or have a judgment placed against you.

PRO TIP: Check your credit report(s) often to find out what’s affecting your score. Sometimes, you can get a reporting bureau to delete certain activity.

5. Credit Age

Understand that lenders want to do business without people who have a well-established line of credit.The age of your credit history plays a big role in how likely you are to get accepted for a loan. In general, two years or more is considered optimal.

PRO TIP: Keep old accounts open and current at all times.