Knowing What Can Affect Credit Score Should Help to Build and Maintain a Good Score

All kinds of businesses heavily depend on credit, especially loans, for business financing. For business owners, credits are a way of life. So, they must not only learn how to live with it but also have easy access to credit so that they can avail it anytime. Managing business finance is never easy. There are situations when business owners desperately need funds quickly to keep the show running. Stress on cash flow often compel business owners to avail credit may be for buying raw materials, paying debtors or salary bills. Therefore, they should always ensure that they have easy access to credit by maintaining good personal credit score and monitor it closely. Since your personal credit score shows whether you have a stable financial history, and it even reflects your ability in managing credit satisfactorily. Lenders use it as a yardstick to determine your reliability as a borrower.

To maintain an excellent personal credit score, business owners must carefully monitor it by periodical checking. Besides collecting the free annual credit report from one of the major credit rating bureaus Experian, Equifax, and TransUnion, it would be necessary to check credit score on an ongoing basis because it keeps fluctuating. Depending on the way you manage credit, your credit score keeps changing, and you must always have the latest score known to you. It helps business owners to judge how much credit they can access. Business owners can subscribe for Free Score 360 monitoring and free credit report by paying some fees. Thus, they can be aware of their personal credit score at any point in time.

On knowing the credit score, business owners can create a plan of action to improve it in case the score is not satisfactory. Lenders prefer a credit score between 700 and 850 even though there is no set rule; it depends on the lending company. Since the credit score impacts the individual's creditworthiness, it is important to maintain a good credit score that opens the doors of easy credit for business. One thing to remember is that your personal credit score is what matters most, even if you seek business credit. But before you plan any action for improving your personal credit score, you must be aware of the factors that impact your credit score.

Factors that impact the credit score

Your payment history assumes the highest importance (35%) followed by Credit utilized or amount owed (30%). Next important are your credit history (15%), new credit (10%) and types of credit in use (10%).

Payment history

Payment history is the most critical component of your credit score. Lenders will first like to be sure that they would get their money back that they lend you. They want to be sure that they can trust you in repaying the money loaned to you on time. Payment history first considers whether you pay your bills on time, and delayed payments carry negative marks. Marks given for late payment depend on the amount of delay – 30 days, 60 days, 90 days, and more. Besides, accounts sent for collections as well as incidences of debt settlements, charge offs, foreclosures, bankruptcies, lawsuits liens, attachments and public judgments gone against you all carry negative marks. The frequency of missed payments and the time since the last negative event affect the deductions of credit score.

Credit utilization or amounts owed

The ratio of debts you carry as compared to your credit limit is an important factor, which is the credit utilization ratio used for computing credit score. To understand the credit utilization ratio, how much credit you availed of the total credit limit is the most important factor. It does not mean that you must maintain zero balance because it would prevent lenders from assessing your financial stability and how responsibly you manage credits. Next, the specific types of credits like credit cards, auto loans, mortgage loans, etc. are important because it represents the credit mix that helps to evaluate your responsibility level in managing each of these accounts. How much you owe in total and what is the outstanding credit you carry are factors in determining credit utilization ratio.

Length of credit history

How long you have been using credit is another factor that impacts your credit score. How long you have been using credits and the average age of all your credit accounts and the age of your oldest credit account - everything matters in calculating your credit score. Long credit history can be beneficial provided there are least negative incidences like missed payments. Short credit history is also not bad if you have a good payment history, do not carry too many credit accounts, and do not owe too much. Leaving credit accounts open even if you do not use it should help to maintain a long credit history. As the accounts age, it improves your credit score.

New credit

How many new accounts you have is one of the considerations for your credit score. It looks at when you last opened a new account and how many you have applied for recently. Against every new application for credit, lenders initiate a hard inquiry or hard pull that cause a temporary decline in your credit score. If you have opened several accounts in the recent past and the percentage of new accounts is high as compared to the total accounts, it increases your risk as a creditor. The number of accounts also has a link to your total debt obligation, which would likely be high, which further increases the risk.

Types of credit currently in use

The formula for determining your credit score will also take into account the credit mix whether you have credit cards, installment loans, store accounts, and mortgages. Besides, the total number of accounts you have is also a matter of consideration. While it is good to have varied credit mix, even if you do not have it, nothing to worry about because this is a very low impacting factor.

Now that you know the factors that contribute to your credit score, you can identify the weak areas and make improvements for bettering your credit score.