In order to take out a loan from commercial banks or from other lending firms, you need a good credit score to do so. There are five basic components of a credit score and they are payment history, debt balance, credit history time span, new credit and variety of credit a person has.
Payment history makes up 35% of your total credit score. IF the lending firm sees that you pay your debts regularly and on time, you have a good chance of loan approval. Paying on time means that you pay your acquired debts within 30 days of the due date of the bill. Paying on time not only increases your credit score but it also lessens the amount you have to pay for interest rates. Note that a single late payment could mean a drop in your score. How much impact late payments affect your credit score depends upon how positive your score was prior to the latest late payment.
Debt balance or how much loan you still owe to your credit makes up 30% of your credit score. Keep your credit balance 50% from you r maximum limit and you will be fine. In order to be safe, it is even advised that you keep it as low as 35% from your maximum balance. If you really need to purchase a big item, you can split it between two credit cards so that you will not max out one of them.
Your credit history time span makes up 15% of the credit score. Ideally, you should have your credit from three to seven years so lending firms can approve your loan application with them. This states that for three to seven years, you have been paying your debt regularly and that by now, you have the significant amount in your budget stashed away to pay off your debts. The highest possible score from the length of credit criteria can be obtained if you had credit for as long as seven years or more.
New credits get 10% of the total criteria in computation of credit score. This component is shared by inquiries and new credit applications. There is an inquiry every time a lender requests for your credit report. The impact of this is only minimal up to a point or so. Meanwhile, opening a new credit account will have a larger impact on your credit score but only on a short term basis only. So if you are about to make a loan or if you are about to apply for a loan, you are advised not to open a new credit account. Do not for credit you do not really need. This is just temptation, making you purchase more stuff that you cannot really afford.
Lastly, the variety of credit you have has a significant impact on your credit, comprising of 10% of the total score. Having a good blend of credit will increase score, although not as much as having a reliable credit history. A good mix of loan includes car loans, student loans and credit cards.
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