Why it so important to understand the factors that affect your credit score
In school, you were always told about things going on in your permanent record. The only permanent record you have as an adult is your credit score. However, your credit score does follow you around everywhere you go.
So it’s absolutely important to understand the various factors that affect credit score.It decides whether you can get a loan to buy a car or house. It impacts your interest rates and insurance premiums. A bad credit score forces you to pay expensive deposits for rent, utilities, and mobile phone service. It can even affect whether you get a job or a promotion.
Bad credit is like a black cloud hanging over you everywhere you go. It’s overwhelming and fills many people with uncertainty. But you don’t need to passively accept bad credit. Stop holding yourself back with fear and doubts. Debt can be conquered.
It’s possible to buy the car or house of your dreams. Taking control of your financial situation is a breeze when your know-how.
Upto this far you understand that it is extreamly important to monitor the negative factors that affect credit score so badly in a fixed interval of time. For this you need to get a free copy of your credit score. Now comes to the next part.
How to get a free annual credit report
Your credit score affects your life in many ways. So the only way to improve credit and protect yourself and your money are to stay on top of Big Brother. All three agencies are required by federal law to provide you with free annual credit report at your request once every 12 months. You also have 60 days to report a free copy if you’re denied credit, insurance, or employment based on bad credit. To order, visit annualcreditreport.com or call 1-877-322-8228.
Anatomy of FICO Score
Sometimes you will be in wonder that why is my credit score going down after a certain time? Why would my credit score drop? First, what are the components of your FICO score anyway? Your credit score is generally comprised of the following five components.
- 35% Payment History
- 30% Credit Utilization
- 15% Length of Credit History
- 10% Credit Inquiries
- 10% Type of Credit Used
Why does credit score vary across credit bureaus?
To make the lending decision quick and properly more than 90% of business uses the FICO system to know the financial health of their customer. The biggest three credit reporting companies in the United States Market are Experian, TransUnion, and Equifax.
Each credit reporting company set their own standard and business model because of this each of them makes their own changes to formulas according to their own rules. This change causes your credit score may very little bit for different reporting companies. However, there are various ways to improve credit scores.
Seven Factors that affect credit score
Payment history (35%)
This means the bulk of your credit score is made up of on-time payments and how much available credit you have. If you pay all your dues, credit accounts, loans on time each month then you are in a good position. How you handle your debt and how well you pay them is the most important factor that affects your credit score.
If you miss any payment then a single late payment could have a significant effect on your credit score if you hold a higher credit score. According to the FICO data, a 30-day late payment could hurt you as much as a 90 to 110 points drop in your FICO credit score. Provided that you are an initial score of more than 780 and you never missed a payment on a credit card.
Debt Burden (30%)
Many experts will tell you to stick to 30 percent of your available credit. I recommend keeping your available credit at 94 percent. You should only be spending $6 for every $100 of available credit you have. In short debt burden is the other most important factor that affects your credit score.
If you want to successfully raise your credit to the best possible score. So in practice, your credit limit will be five to six times high than your usages limit to game the system. This lowers your credit risk and makes you someone lenders love to work with.
Length of your credit history (15%)
The length of your credit history contributes 15 percent of your FICO score. This is a relatively less weighted factor in all other factors that affect credit score.
Normally it takes six months of payment history to establish a credit score. In general, the longer the history, the more effect on the score.
So, in a nutshell, among all the factors that affect credit score, the largest component of your score, Payment History, looks at missed or late payments. Credit utilization subtracts the amount owed from your credit limit. Length of Credit History looks basically at the Average Age of Accounts (AAoA) and how long it’s been since they were used.
Credit Inquiries or “Hard inquires” happen when you authorize a creditor to check your score. Finally, by Type of Credit Used they mean Credit Mix. They like to see a variety of different types of credit account types, e.g., revolving, installment, open.
Hard inquires may affect your Score (10%)
Hard Inquiries are the less weighted factor in all other factors that affect credit score.
Applying for new credit may have an effect on your credit score but depends on each person’s credit history. In general, there is very less effect on your FICO score. One additional credit inquiry (hard) may result in five negative points in your score.
Type of Credit Used (10%)
One of the most common factors used to calculate your credit scores is Credit mix or the diversity of your credit accounts. Maintaining different types of credit accounts, such as a mortgage, personal loan, and credit card show lenders that you are a potential customer who can manage different types of debt efficiently. It also helps them get clearer information about your financial healthiness and the potential to pay back debt.
Defaulting on accounts can affect your credit
Various types of negative information like foreclosure, bankruptcy, repossession, charge-offs, settled accounts can show up on your credit report. Each of these negative items can severely hurt your credit for years, even up to a decade.
Can Service Accounts Impact My Credit Score?
Service account like a utility bill, phone bill payments don’t have any direct effects on the credit score but if you miss any payment and the account was referred to a collection agency then it could affect your credit score.
But there is good news that a new product called Experian boost allows users to get instant credit for on-time payments on utility and telecom accounts.
There are a few more factors that affect credit score. These are the less important factors but are still quite important.
- How the credit reporting agencies collect and maintain your credit information
- What information does CRA collect
- How is your fico score calculated
Now let’s talk about small things you can do that can potentially make a big impact on your score to change your life!
Late payment Can be a Factor that Affects your credit score
Late payments are directly related to payment history. It is the most common thing among consumers and the effects of late payment on credit score create a tremendous effect on your credit. Suppose if you make a thousand-dollar payment for various credit cards but you forget to make a payment for $50 for a single credit card. It will hurt your credit score dramatically. The longer time you late the payment, the more effect on your score. So be care full about things that affect your credit score negatively.
A single late payment could have a significant effect on your credit score
If you hold a higher credit score. According to the FICO data, a 30-day late payment could hurt you as much as a 90 to 110 points drop in your FICO credit score. Provided that you are an initial score of more than 780 and you never missed a payment on a credit card.
For example, a consumer with only two late payments history and an existing 680 FICO score could drop 60 to 80 point in his score after hit with a fresh 30 day late payment on any of his credit account. (one is two years ago a 90-days late payment on credit card account and the second one is approximately one year ago a 30 days late payment on an auto loan account)
Collections Accounts on Your Credit Report Can affect credit score?
If you fail to pay your debt before the 90 days late payment period then your debt is sold to a third-party collection agency or internal collection department. It will be updated in your credits reports and your score will suffer.
Are you thinking of how does collection affects credit score? Do not worry, we can help you in this regard and you can bring back your credit point. You may be surprised by what is on your credit report. It may be something from years ago like an old cable bill that you missed when you moved. That happened to me when I received a collection notice for $156 for an old Comcast bill from a house I’d moved from several years ago and didn’t even know about it.
How much does a collection affect credit score?
That one collection notice on my report was driving my score down by maybe 100 points. That was an honest mistake. Every time when you see a collection account on your credit report, you feel uncomfortable thinking that this account has a negative effect on your credit score. You will see this account in your credit report each time a collection agency reports debts to credit bureaus. Thus, these affect your credit score negatively.
However, there are some ways to get the thing sorted out. And you should always try to stay on top of all three credit reporting agencies. To avoid the damages to your credit score by the collecting account keep reading, the next section we talk all about these.
How many collections affect credit score
The amount of collecting debt has no effect on your credit score. For your better understanding if you have a debt of $500 and it reduces your credit score by 50 points. A $1000 debt also reduces the same amount of points – 50 points from your current credit score.
There will be a major reduction in your credit point when the first time’s collection account reports. After that, each additional collection will add a limited effect on your credit score.
Removing a collection account will usually boost your credit score
It’s always good to stay on top of all three credit reporting agencies. When you contact a collector for settlement, you should try to agree with them to a “payment for deletion”. There is a good chance it will help to boost your score. You have to check whether you paid the collection or remove the collection account, in both cases how many point you can earn.
In this regard you have two options: 1) A mortgage company can pull your credit in the last 30 days and they can run such simulation. or 2) you can sign up in a three bureau-monitoring site for www.privacyguard.com and run the analysis.
These scores are consumer scores, not the FICO score but it helps you to decide which collection(s) should you try to pay or delete based on the potential score improvement. Of course, there may be another reason to pay for a collection. But if you are looking for score improvement, follow the instruction above or call us – we always use these tools. Not all agencies will agree to pay for deletion.
What to do When Charge off has a highly negative impact on your score
A creditor will charge off your account after 180 days of no payments when you do not pay anything to debt. A charge-off has a highly negative impact on your score. It stays on your report for 7 years from the date it missed the payments.
The creditor often uses a third-party debt collector to attempt to collect payment after an account has been charged off. The original creditor may hold the account but assign it to a third party for collection.
In this case, the original charge off with the balance will be reporting. However, a new collection account will report to your credit file if the creditor sells the debt. So it is always advisable that you should care about all these various things that affect your credit score.
Solve the problem with the original creditor before they sell the debt
Now you have two major negative items on the same debt, a charge-off, and a collection. It is a good idea to solve the problem with the original creditor before they sell the debt and the collection account shows up. The first collection can cost you 100 points negative if your credit score is in the 700s.
If you have lower scores and other negatives. Then the new collection has less effect on your credit score. But it is still significant. So it’s a good idea to take care of things that affect the credit score. Since FICO, algorithms are extremely complex and the details of how they work are kept highly secret, we cannot describe exactly how many points your score will drop due to a charge-off or a collection.
Hard inquires can be a Factor may affect your Score
Applying for new credit may have an effect on your credit score but depends on each person’s credit history. In general, there is very less effect on your FICO score. One additional credit inquiry (hard) may result in five negative points in your score.
Hard inquires are those, which generated when you apply for new credit and your lender request for your credit to a credit bureau. Even if your credit score changes by inquiry, it will list as factors that affect your credit score. So, from time to time you need to monitor all these things that affect your credit score.
Inquiries from potential creditors consider against you
Therefore, your own request does not have any impact on your score. But you should always try to stay on top of all three credit reporting agencies. Do not apply randomly for your credit cards. Before applying to do your homework, Compare rates, terms and features offer by the lenders and then only apply.
It is not just you, and it’s not your fault. It happens to all of us. One study showed over 34% of Americans had 620 or lower “Bad Credit” scores. Maybe they had a health issue, maybe they were in between jobs.
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