Credit scores are important for it could make or break your deal when loaning from a bank or other lending firms. There are five categories included in the computation of your credit score and each has its own weight in the equation. The five categories are payment history, which is given 35%, amounts owed with 30%, length of credit history with 15%, new credit with 10% and types of credit used with 10%.
The largest part of the equation for the computation of your credit score is payment history. This is because with this data, creditors can see if you can pay back the money you will loan or not. If based on your payment history, you repay your debts on time, then most likely you would be approved in your loan application. Negative marks you should watch out for in your payment history are late payments, accounts sent to collections and bankruptcies. The more recent your negative marks are, the larger the probability that you would not be approved for a loan.
Amounts owed refer to the outstanding debt you still have. If you have credit cards, if you own a home or car or if you have a child going to college or if you yourself are in college, chances are you have loans to pay back. This is normal, this is not what the creditors are looking for, and everyone has his or her own debt to pay. What the lending firms are looking for is if you maxed out your credit card already or if you leave them open without any activity. Make it a habit to keep your credit cards 25% less of your current balance. Also, to raise your credit score, pay off first those with the highest interest rates or pay late payments first.
In terms of length of credit history, the shorter it is, the bigger the risk you are presenting to your lenders. But, even if you do have a long history of credit, yet you have numerous accounts opening and closing over the period, it will still have a negative impact on your credit score.
You might have heard this, but it is still beneficial to reiterate, do not open a new line of credit before going to a lending firm to apply for a loan. This is because your score will go down for a while after you open a new credit line. There are two types of inquiries that will directly affect your credit score. The soft inquiry usually just involves a quick glance at your score. A hard inquiry, on the other hand, does lower your credit score, it is typically an action initiated by you in order to obtain a credit.
There are types of account that if you pay them on time regularly will help increase your credit score such as student loan, car loan, mortgage and credit cards. However, bankruptcy, tax lien or collection will have a negative effect on your credit score so it should be avoided.
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