The Components and Non-Components of Credit Scores

 

When borrowing from a lender, credit scores are always the point of concern for borrowers. There are lots of confusions associated with how credit scores work and what you can do to improve them. Of course, the simple rule of remaining in the whitelists of the lenders is to repay the money you owe to your creditors in a timely fashion. You should not consume more money than you can return easily. In addition to that, you should also know in general how credit scores work and what components make them up. Let’s get into the details.

The Components of Credit Scores

Your Payment History

The first thing that matters in credit scores is the credit history. It also remains the most important and the heaviest of all metrics in various credit scoring models. When it comes to payment history, the credit bureaus are keeping an eye on how comfortably you are returning the amount you owe to your lenders. First, they will see if you have been making your repayments on time. There is a huge negative point on your score if you miss a payment. Now, missing a payment is not the only thing that matters. What also matters is the amount that you have missed.

The frequency of your missed payments will also be accounted. If you are constantly missing payments, it is an indication that you are not a reliable borrower. It is highly recommended that you repay the amounts you owe according to schedule that was decided between you and the lender.

Your Available Credit

Just because you have credit available does not mean you have to use it all. Some people think they can positively impact their credit scores by using all the credit and repaying it. What they don’t realize is the fact that it shows their reliance on credit. Why do you need credit so much and so frequently? The point here is not to show how much of the credit you can return to the lender. Instead, you have to show the credit bureaus that you are managing your money well. Positively affecting your credit scores requires you to use only a small portion of the credit available to you.

Length of Credit History

The length of your credit history also matters. The most important thing here is to realize that you can’t have a perfect credit score when you start. The starting point is in the middle of the ranges. You then have to maintain a good credit history to enter the better ranges. In addition to the overall credit history, the credit bureaus will also look at the time when you last took an action. If you have not been doing any credit transaction for a long time, it will not have any impact on your credit scores. The whole idea is to keep your credit going by opening new accounts and closing them with good standing.

Your Credit Variety

It might not be the most important factor affecting your credit scores but it definitely matters. It is always there in every credit scoring model and that’s why you have to pay attention to it. As the title suggests, it is about the different types of credits you have been using in your life. If you want to keep this score on the rise, you have to use different types of credits. It is like sending a signal to the credit bureaus that you can take care of not just one but many different credit varieties. However, you should only use credits naturally. Do not try to get different types of credits only to prove the point.

You might end up losing some points on your credit scores if you default any of those credits. So, be sure that you do not attempt something adventurous on your credit.

You Opening of New Credit Lines

Opening new credit lines can help with credit scores too. However, you should listen to the credit bureaus here. You do not want to open new accounts only for the sake of increasing the score. Open new accounts when you are in need of them.

The Non-components of Credit Scores

In addition to the components that affect your credit score, you should also know about the factors that don’t matter. A lot of the borrowers are not too sure about which factors affect their credit rating. In fact, they keep worrying about points that are not even included in the credit scores. For example, your age and the title of your jobs are the factors that are not taken into account by the major credit bureaus. However, you should ask the lender about these things because they might consider these points. The place where you live does not matter and affect your credit scores either.

Last but the most important of all is the inquiry you make into your credit. Many people have lived with the belief that checking their credit score will affect it. What they don’t realize is that there are two types of inquiries. A hard inquiry is made by the lender before forwarding you the loan. Yes, this inquiry has an effect on your credit score. On the other hand, the inquiry you make into your credit history is a soft inquiry. It does not have any impact on your credit score. In fact, it is considered a good indicator that you care about your credit score and are doing something to improve it.

Conclusion

There are many different types of credit scores created from a variety of credit scoring models. FICO score remains the most used in the country to this day. You are highly encouraged to make inquiries in your credit history often so you know where you are standing. In fact, you now have the reporting in your hand too. The new online tools from the credit bureaus now allow you to report your good credit payments directly. This helps you improve your credit score like never before. Do not pay any company to check your score because you can do that without paying a penny too.