5 Important Factors Impacting Your Credit

5 Important Factors Impacting Your Credit

Your credit score influences many of your financial choices. Getting good interest rates on a mortgage or car loan is directly related to your credit score. In fact, having bad credit can affect your ability to even get approved for certain loans. So, knowing what factors impact your credit can help you strengthen your credit, as well as avoid those things that negatively impact it.

  1. Your Credit History

It’s not a big surprise that your repayment history is number one on the list of things that affects your credit score. What might surprise your is how certain creditors interpret your credit history. For example, if you go to rent an apartment. The rental agency may not care if you’re late on a few credit card payments, but if there are dings against you because you were delinquent on prior rental payments, then they may hold this against you.

  1. Debt to Income Ratio

You may have paid all your bills on time, but having a lot of debt compared to your income will still impact your credit score. Having a high debt to income ratio puts you into a higher risk category for future default. Things happen, you may lose your job or have an emergency that strains your finances, and guess what happens? You can’t pay your bills. These are some of the reasons a person with a high debt to income ratio is categorized as such.

  1. Outstanding Credit

Another factor impacting credit is outstanding credit, even if you haven’t used it. The evaluation of your credit risk is not only based on how well you pay, but on how much credit you have access too. Credit card companies look at it this way: if a person has access to a lot of credit, then it is potentially a risk that they could use it and exceed a reasonable debt to income ratio.

This factor may not be as negative as actually using the credit, but it is a factor in formulating your credit score.

  1. Closing Old Credit Cards

Some people feel that closing old, unused credit cards is a good thing, but not always. Credit scores are based on credit history and history is determined by time. Old credit cards, even unused, still are dated and add longevity to your history. So, even though you may not use an old credit card and want to close it, think twice about doing this for the simple fact that its age may benefit your credit score.

  1. Applying for Credit

Most people don’t realize that applying for credit can impact their credit score, and it does. This happens unexpectedly in the excitement of buying a new car or goods when buying a home. Buying a new car for example. You go shopping at several different dealerships. Each has you fill out a credit application to see how your credit looks and evaluates your buying power. Each time you do this it impacts your credit score.

Your best bet is to apply for a loan at one place, get preapproved and take that with you when buying a car. The same applies to other purchase. Get one or two good credit lines (cards) and make your purchases using them.

We have covered five factors impacting your credit that are controllable and somewhat easy to fix. But there are other factors such as bankruptcy and repossessions that have a long term impact on credit that requires more diligence in discussing. The formula for calculating your credit score is somewhat guarded by the three major credit reporting agencies, but the factors we outlined above are widely known to be important in the overall evaluation of credit scoring.