How Is Your Credit Score Determined?

The importance of understanding what influences your credit score
When it comes to buying a house, purchasing a new vehicle or applying for a credit card, your credit score is bound to come into play. As an influential factor in a financial institute’s decision whether to loan you money or not, your success often rests on this mysterious number. What is this important score and how is it determined? Learning this will help you take steps to raising your score over time.

Your credit score is calculated by a combination of five different factors, each contributing a different ratio of influence. According to Stacy Smith, Senior Publish Education Specialist for Experian, it involves your payment history, utilization, length of credit history, recent activity and overall capacity.

Payment history
Certainly the most persuasive factor in determining your current credit score, your payment history tells creditors about your likelihood of paying back any loans for which you’re currently applying. Amy Fontinelle, personal financial expert writing for Investopedia, explains that consistently paying your credit card, utility bills, student loan and other bills on time month after month will produce a higher credit score that reflects your financial reliability. On the other hand, a track record of late or below-minimum payments will bring your credit score down.

Utilization
Having a credit card and consistently using it will be reflected positively on your credit score over time, but using it too much could actually harm it. According to Dana Dratch, contributor at Bankrate.com, it’s important to keep your balance below 30 percent of your limit on every credit card—both individually and total. For example, if you have a $7,500 credit limit, you don’t want the balance to exceed $1,500.

So, if you’re maxing out your credit card every month for the bonus points—even if you’re paying the bill in full each month—that probably won’t look good to creditors who may see you as constantly spending in excess or charging everything to live paycheck to paycheck. If it reaches 30 percent, proactively pay the balance on the account before continuing to charge to it.

Length of credit history
This factor is not as influential as the first two and it covers multiple territories: how long has each account been open? Are all accounts still actively used or are some being neglected? Does the applicant have a variety of accounts—credit cards, auto loans, mortgages etc? This category is tricky because it is improved over time; suddenly opening a variety of accounts and using them religiously will only hurt your score, explains Smith.

Recent activity
While a healthy credit history is important, so is the current state. If you’ve taken on a loan or opened a new line of credit in the last 6 – 12 months and are applying to do so again, you are more likely to struggle with payments than you would be to excel. This is why you should not open multiple credit accounts around the same time, advises Smith.

Overall capacity
To a minor degree, your credit card reflects how much outstanding debt you have and how that impacts your overall financial situation. If you have a low amount of outstanding debt and a healthy, steady income, you don’t have to worry about this being an issue.

How to read your credit score
Your credit score actually consists of three scores calculated by major credit bureaus Equifax, Experian and Transunion. Each number generally ranges between 300 (low end) and 850 (high end). The higher the three-digit number, the healthier your credit is.

If your credit score is lower than you need it to be, worry not. The number is recalculated often, and healthy financial habits will steadily raise it over time.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

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How a Personal Loan Impacts Your Credit

The relationship between loans and credit scores
It’s well-known that your credit score has a big impact on your ability to take out a loan, as marchfeatured_prsnllnimpactwell as on the total amount of the loan and interest rate your lender offers. But did you also know that the relationship works in the other direction as well?—that a loan can impact your credit score?

To understand this relationship, you have to consider where your credit score comes from. Your credit score is calculated using a variety of factors, including your payment history, the total debt you owe and the number of credit lines recently opened. When you take out a personal loan, the last two factors are affected.

Even just applying for a loan has an impact, since your credit score goes down slightly each time an inquiry is placed on your credit report by a lender checking your credit.

The financial advantage of finding a great loan far outweighs the negative impact that an inquiry has on your credit score. If you take out a personal loan to pay back a high-interest credit card, for example, you would benefit from the reduced interest and your credit score could be improved overall.

“A personal loan may help your credit score by moving credit-card debt over to the installment loan column,” states NerdWallet staff writer Amrita Jayakumar. “The way credit scores are figured, borrowers who use all or most of the available credit on their cards get hit with a significant penalty.”

Another thing to know about the impact that loan applications have on your credit score is that each inquiry may not count fully against your credit score if you are just comparing the rates of more than one loan. For example, if a car dealership places an inquiry on your credit score in the process of offering you an auto loan, and you want to check with your local financial institution to find a better deal, the second inquiry may not count against you.

“Generally any requests or ‘inquiries’ by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry, depending on the credit scoring model used,” according to the U.S. Consumer Financial Protection Bureau. “You can minimize any negative impact to your credit by doing all of your shopping in a short amount of time.”

Once you have taken out your loan, it is important to make regular payments in order to maintain and improve your credit. A strong payment history goes a long way toward achieving a good credit score, and as you pay down your loan, your overall debt will decrease, further benefiting your credit.

So if you are considering taking out a loan, don’t let fear of a negative impact on your credit score stop you from exploring your options.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Credit Scores and Loans

The relationship between your credit score and the loan you need

If you’re interested in applying for a loan in the near future, you may be wondering about the relationship between credit scores and loans. Not only does your credit score impact the type of loan you can receive, loans also affect your credit score. The following information will help you understand more about the ways that loans and credit scores impact each other.

Credit score affects loan interest rates
When you need funds for a large purchase, such as tuition, a new vehicle or a home, it’s important to understand all of the factors that will be important during the loan application process. Your credit score is one of the most important of these factors. If you already know your credit score, you’re one step ahead of many people, but you still have to know exactly what it means.

“Today’s economy runs on credit,” states Erin Peterson from Bankrate. “Good credit can be the make-or-break detail that determines whether you’ll get a mortgage, car loan or student loan.”

Your credit score represents your financial history and paints a picture of how responsibly you have used your credit. Lenders use this information to assess how likely you are to repay a loan. If you have a low credit score, lenders fear that you may not be able to pay off your loan, which will cost them money. In order to balance this risk, lenders offer people with lower credit scores loans with higher interest rates.

“If you have a higher mortgage rate because of a low credit score, it means you’ll be paying that much more in interest in the end,” according to Elizabeth Rosen, Banks.com contributor. “Thus, a strong credit rating can help secure a low mortgage rate, which gives you lower monthly mortgage payments overall.” This is why it’s important to pay attention to your credit if you need to secure a loan.

Loans also affect your credit score
Your credit score has a big impact on your ability to get a loan, but loans also affect your credit score. The application process itself can have an impact on your credit score because each time a lender checks your credit, your score goes down a few points.

“That’s because 10% of your credit score comes from the number of credit-based applications you make,” according to About.com guide LaToya Irby.

Fortunately, this won’t hurt your ability to shop around to find the best loan because there is a grace period during which multiple lenders can check your credit without your score going down. This means that the second lender you speak with will see the same credit score as the first, so you have the opportunity to receive competitive offers.

“Even after you’re done rate shopping, the loan inquiries are treated as a single application rather than several,” explains Irby. “That window of time is between 14 and 45 days depending on which credit score the lender checking your score is using.”

Any loans that you have now can also impact your credit score. You can improve your credit score and prospects for future loans by making payments for any current debt on time. Irby notes that “payment history is 35% of your credit score. That’s more than any other credit score factor.” This also means that paying late or defaulting can seriously harm your credit, so be sure to take your current financial responsibilities seriously.

The balance of your current loans also affects your credit; you gain credit points as you pay back the balance.

“The larger the gap between your original loan amount and your current loan balance, the better your credit score will be,” states Irby.

Your credit score and loans go hand-in-hand. Good credit can help you receive a good loan, and good loan repayment patterns can help you achieve good credit. The steps you take today to repay your loans responsibly and take care of your credit will boost your ability to get a great loan in the future.


Used with Permission. Published by IMN Bank Adviser
Includes copyrighted material of IMakeNews, Inc. and its suppliers.