Credit scores are an important aspect of overall financial well being. A credit score is a number that attempts to encapsulate the risk you present to lenders when seeking debt. A strong credit score can help you qualify for loans and credit as well as lower interest rates on debt. Credit scores are calculated using a variety of personal credit information. Understanding the factors that influence credit scores can help you make wise financial decisions.
Credit and Debt Levels
The amount of credit and debt you carry is one of the most important factors in determining your credit score. In general, the more debt you have compared to the credit lines you carry, the lower your credit score will be. Taking on a large debt like a mortgage, car loan or personal loan may result in a lower credit score. The higher your credit limits and the lower your credit balances, the better your credit score. For instance, having a $10,000 credit limit and a $1,000 balance it is better than having a $1,000 balance on a card with a $2,000 limit.
Debt Payments
How you pay off your debts also impacts your credit score. Making late debt payments or missing payments is a signal to lenders that you might miss payments in the future. This can make it difficult to secure loans. Make payments on time to maintain a good credit score. If you make a late payment, your creditor might be willing to exclude the event from the information it sends to credit reporting companies if it was an isolated incident and you are normally a good customer.
Credit History
The length of your credit history is another component of credit scores. Creditors typically look more favorably upon those with longer credit histories. Those with short credit histories -- like students, teens and young professionals -- may have more difficulty securing loans and credit than older workers with a longer history of borrowing money and paying it back.
New Credit
The amount of new credit you receive can impact your credit score. According to MyFico, a website for consumers sponsored by the company that created the credit-scoring formula, recently opened accounts and recent inquiries from creditors can harm a credit score. The negative impact of a new account on a credit score will decline over time, but if you plan to take out a large debt, such a mortgage or auto loan, you may benefit by avoiding new credit and credit inquiries in the short term.
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