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What Influences Credit Scores

Written by Carla Hill on Sunday, 09 September 2012 7:00 pm
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Its a three-digit number that carries a lot of influence over your future. It can dictate whether or not you'll qualify for a home, car, or business loan. It can also be the deciding factor in whether or not you qualify for a low interest rate.

What exactly is a credit score and what factors contribute to its number?

A credit score is a number from 200 to 800 that reflects your payment and borrowing history. Are you a big spender? Do you make payments faithfully and on time? It's what lenders use to decide a number of factors, including whether or not to lend to you.

There are three main reporting agencies: TransUnion, Experian, and Equifax. Can a credit score from these agencies be biased? The simple answer is no. Your credit score is a true and honest reflection of your debt and payment history. This means that neither a lender nor credit agency can "have it out for you." You are the only person responsible for your score.

There are several factors that contribute to this score.

  • Type of Credit: Lenders want to see that you have a history of multiple types of credit. This can include credit cards, installment loans, and mortgages.

  • Amount of Debt: The more debt you have the riskier you appear to a lender. This means paying down or off debt is a great way to make yourself more desirable for a home loan.

  • Payment History: You want to be on time with every bill. This includes everything from cable and phone to credit card payments. Late payments may be reported to the credit reporting agencies and will negatively affect your score.

  • New Credit: Do NOT under any circumstances open new lines of credit, no matter how small, before you start looking for a home. Several new lines of credit will dock your score and may indicate to a lender that you are on a spending spree.

  • Credit History Length: Younger borrowers are always at a slight disadvantage because they have a shorter credit history. A longer credit history gives lenders a better picture of what kind of borrower you really are.

    Be sure to check out your credit report three times a year at annualcreditreport.com. It's free, easy, and secure. You'll have to pay a nominal fee in order to see your score, but checking out your report can help you assess areas that need improvement or areas that have errors which need corrected.

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