Have you been surprised to find that your credit score is low and this is why you have been rejected for a loan? If so, you are not alone. Many people do not understand the various factors that do affect the credit score, bringing it down to a level that is unacceptable to lenders. When you have a greater understanding of what your credit rating actually entails you will be in a better position to know whether or not you should apply for a loan.
The three credit reporting agencies have a specific process that they use in order to determine your credit rating and score. Your credit score is divided into several sections with percentages assigned to each section. Your payment history makes up a large percentage of this about 35%. When lenders look at your credit report, they will view your past history of making payments on time. Any late payments you have made in the past will show up and lower your score. Missing payments has a negative impact and if you have defaulted on loans or if creditors have had to resort to court judgements in order to obtain payments, all this information is included in the report and has a detrimental effect on your score. If you have declared bankruptcy in the past, this too has a negative impact on your rating.
However, not all negative items will deter you from obtaining financing. When determining a person’s credit score, the length of time since anything negative has been posted by one of the credit reporting agencies also plays a part. One missed payment in a lengthy period won’t have much of an impact either.
Your current amount of debt makes up about 30% of your credit score. Lenders will see the total amount you owe and will weigh this against your current income. The score given to this section of your credit report is the total of debt you have from all sources and then the amount is divided by the total of all credit you have available. This means that even if you have outstanding balances on your credit cards, if they are not maxed to the limit, you still have available credit.
The number of years you have had credit accounts for another 15% of your score. The longer you have had credit and have been making your payments on time will give you a higher proportion of this percentage. This helps to establish a pattern of behaviour. If at some time in your past you did undergo a tragic event that caused you to have financial problems, lenders will be able to see that this was a one time event. They may ask you to explain the circumstances to ensure that you are still a good risk to repay the money you borrow.
Most consumers do not realize that every time they apply for credit or a loan, this shows up on their credit report. The more frequently you do submit applications, the greater impact this has on lowering your credit score. This frequency makes up 10% of the credit score so the longer the period of time between applications for credit you have, the higher this percentage will be.
The type of credit that you have is also a factor that could lower your credit score. Revolving credit means that you can pay off a balance or part of a balance and then reuse the credit, such as in a credit card or a line of credit. Installment payments on credit or loans mean that you are working to pay off the balance and when it is repaid you do not have any credit available to you on this loan. The type of credit you have accounts for 10% of your score and you will have a higher score if you have a blend of credit from different sources.