A credit score is a number lenders use to rate a person's creditworthiness. Based on the credit score, a lender is able to determine if a borrower is likely to repay a loan. The lower your credit score, the more of a credit risk you appear to be to a lender. Having a high credit score saves money on interest and lowers the full amount you must pay back to discharge the loan. According to Veracity Credit Consultants, credit is made up of five categories listed below (See References).
Payments
One factor that affects 35 percent of your credit score is how timely you make your payments. Making payments late, having collection accounts and bankruptcies all lower your credit score. An easy way to prevent payments from being late is to set up auto-pay on credit accounts, such as credit cards and loans.
Outstanding Credit
Thirty percent of your credit score consists of outstanding debt. To raise your credit score, never max out credit cards or close out old credit-card accounts that have a zero balance. Keeping your credit-card balances below 25 percent of the credit limit helps raise your credit score.
Credit History
The length of time you have had credit controls 15 percent of your credit score. Being patient after establishing credit before making larger purchases, such as a home, may be beneficial. Also, start establishing credit as soon as you are a legal adult, and keep the accounts in good standing.
New Credit
Receiving new credit can lower your credit score. New credit accounts for 10 percent of the total score. Avoid opening new lines of credit before a major purchase, such as an auto. Do not allow each creditor to pull a credit report since inquires lower your credit score.
Type of Credit
There are four basic types of credit that control 10 percent of your credit score. These are revolving, such as credit cards, loans such as auto or personal, public records and collections. The positive types of credit are revolving and loans. They help improve your credit score if you make the payments on time and avoid becoming overextended. Having public record and collection accounts on your credit lowers the score. Avoid receiving these from tax liens or bankruptcy.
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