A credit score is a three-digit figure that lenders use to assess a potential borrower's credit risk. There are five key elements used to determine credit ratings behind the number itself (credit scores normally vary from 300 to 900). Lenders evaluate these ratings to determine how likely you are to repay your debt; thus, they are frequently the determining factor in whether you will be approved for a new loan.
Knowing what characteristics and types of accounts affect your credit score provides you the opportunity to improve it over time as your financial profile changes.
History of Payments
Payment history is the most essential factor in credit rating, and even a single missed payment can lower your score. When assessing you for new credit, lenders want to know that you will pay back your debts on schedule. Payment history accounts for 35% of your score, which is used by most lenders.
Each month, pay your bills by the due date. Late payments can seriously harm your credit score, so set up automatic payments to ensure you never miss a payment. If you're paying via online banking, make sure you pay a few days ahead to ensure your money is received on time.
Amounts That are Owed
The next most important component in your credit score is your credit consumption, as measured by your credit utilization ratio. This ratio looks at how much of your available credit you're using and might show you how reliant on non-cash funds you are. Using more than 30% of your available credit is seen as a red flag by creditors.
Pay down your credit card bills and other debts to the point where you're only utilizing a percentage of your available credit. Once your credit utilization is below 30%, hold it there for at least a month and your credit score should improve.
Length of Credit History
Your Credit Score is calculated in part by how long you've had credit accounts, making up 15% of your score. This contains the age of your oldest credit card, the age of your newest credit card, and the average age of all your credit cards. Credit scores rise with the length of your credit history.
When you finally pay off your debt, avoid the desire to close your credit accounts straight away; keeping paid-off credit products available can help you maintain a low credit utilization rate.
Obtaining New Credit
Lenders will look at how much fresh credit an applicant has when applying for a loan. Lenders value this element since it allows them to observe how you normally shop for credit, accounting for 10% of your credit score. When applying for too many loans/credit cards in a short period of time, your average account age will decrease, and your length of credit history will be affected, affecting your total credit score and how lenders see you.
Make sure there aren't any credit inquiries on your credit report on a frequent basis. Soft credit checks, such as those conducted by you or a prospective landlord, have no bearing on your credit score. Hard credit checks, on the other hand, are required whenever you wish to extend your credit limit or apply for a credit product/loan.
Credit Types in Use
Your credit mix makes up 10% of your entire credit score computation. Having several types of credit accounts on your file and managing them properly can improve your score and demonstrate to creditors that you can effectively borrow from both types of credit. Maintaining a healthy balance of instalment and revolving credit will help you improve your credit score.
Are you planning on buying your first home in the GTA? What you need to know about your credit score, and how to proceed.
Being a savvy borrower entails good debt. All debt, in our opinion, should be prudently managed. Before you ask for financing, the smartest thing you can do for yourself is think about how your current financial decisions will affect your future financial decisions.
Contact Jay Paramanathan today if you're wanting to buy a home in the GTA but are concerned about your credit score. He takes delight in assisting you in buying your home in a relaxed manner while achieving the best potential results.