Contrary to popular belief, there’s no such thing as a universal credit rating. Just because one provider rejected your loan application doesn’t mean you can no longer get approved from other providers. But even without a universal credit rating, it pays to fully understand how credit rating is formulated. This way, you know exactly what to pay attention to maintain a good credit score.
According to the FICO format, your credit score is broken down by five factors and they include:
One of the most important factors that affect your credit rating is your payment history. In fact, it is 35% of your score. If you’ve always been a good payer then there’s nothing to worry about. If you have a bad credit, however, you might want to recommit to paying your dues on time to maintain a good credit rating.
The total amount of debt you have is another key factor that significantly affects your credit score. It is 30% of your score, which means that lowering the total amount you owe whether through a personal loan or credit cards will hugely improve your credit rating if you have a bad credit score.
The age of your credit history is 15% of your credit score. If you’re trying to build your credit, older accounts play an important role. There’s really no other way than to start from scratch if you’re a newbie. As your accounts get older, it will eventually help your credit rating. Just remember to minimize your new account applications once you’ve established a credit history. Too many new account applications can only do harm than good for your overall credit rating.
New credit inquiries
If you applied for a personal loan, your lender will inquire about your credit report and that is the kind of hit you want to minimize. Even if new credit inquires is only 10% of your credit score, you’d still want to be careful when applying for a personal loans and other financial products. Too many inquiries can result to a negative effect on your overall credit rating.
Types of credit
Finally, types of credit is the last factor that affects your credit rating. It is 10% of your credit score. This covers the types of accounts you own. The more diverse your credit types are, the better for your credit rating. If you have a mortgage then a car loan as well as credit cards then you have a diverse types of credit, which again is good for your credit rating.