My credit score is generally the figure that any lender, e.g., an auto lease, a car refinancing company or auto loan lender will use when determining the risk that may be associated with lending money to me. Mortgage companies, auto dealerships, and credit card firms are some of the most common types of financiers that will go the extra mile to check my credit score before making a decision on whether to loan me money, how much to loan, and the interest rate that they are to apply.
Over the years, I have also come to note that employers, landlords, and insurance companies are generally interested in checking my credit score. Often, this is used to determine whether I am financially responsible before they can offer me a job, give me a lease agreement, or even allow me to insure my car, home, and other personal assets.
What Counts When Calculating a Credit Score?
The purpose of the credit score report is to help determine whether or not I am responsible in terms of managing credit as well as help establish whether I have been financially stable in the past. Credit scores often range between 300 and 850, with 300 being the lowest score possible. Leading financial agencies will now use the information that is contained in my credit file to help them come up with the FICO scores.
It is common for different agencies to report different FICO scores, but of importance to note is that the scores do not vary too much. At the end of it all, regardless of the agency that I choose to obtain the report from, all reports ought to paint a very similar history. The following are the elements that help make up my credit score. I have also noted the weight carried by each element mentioned.
1. My Payment History: 35%
Whenever I am applying for a loan or car refinancing from a lender, the main question running through the mind of the lender tends to be: “Will the borrower be able to pay it back?”
Payment history is, therefore, the most essential component of any credit score report. It is aimed at establishing whether the lender can trust me to repay back the money advanced to me. The component typically looks at factors such as:
- For each account that is mentioned in my credit report, have I been paying the bills on time? Late payments will normally have a negative effect on my overall score.
- For instances when I have made late payments, how late were these payments—thirty days, sixty days or more than ninety days? The more I delay to make this payment, the more harm I do to my score.
- Of the accounts mentioned in the report, how many have advanced to the collections stage? Many lenders see this as a very big red flag as it means that I might not pay back the money they have advanced me.
- Does my credit score report have any liens, wage garnishments, bankruptcies, lawsuits, foreclosures, debt settlements or public adjustments against me? Note that these are all items of public record and will often constitute a dangerous mark on any credit report.
- My frequency of missing payments and the time that has elapsed since I last posted a negative event on my credit profile. For instance, if I last missed making a credit payment 5 years ago, an auto loan lender might view me as a lesser risk as opposed to if I had missed making a big payment in the past twelve months.
2. What Amounts Do I Owe: 30%
So what if I have been making all the required payments on time, but I am almost approaching a breaking point?
The FICO scoring system has been designed in such a way that it gets to consider my credit utilization ratio. The ratio is meant to measure my total debt against my readily available credit limits. For this particular component, it looks at factors such as:
- In total, how much money do I owe as compared to the initial amount advanced to me in the form of installments? Here, less is always better.
- For the accounts listed on my credit profile, how much do I owe in each account, e.g., installment accounts, mortgage, credit cards, and auto loans? The software used to come up with my credit score likes to see that I have combined a variety of credit accounts and that I am doing all I can to manage each account in a responsible manner.
- Of all the total credit that is available to me, how much have I used? At this juncture, I would like to point out that just because my account may have a zero balance does not mean that my credit score will be better. In some cases, owing some money will be better than having a zero balance. This is because there are lenders who would like to see that I do indeed borrow money and make responsible use of it.
3. For How Long Have I Been Borrowing: 15%
My credit score will also consider the length of time that I have been borrowing. This relates to the number of years that I have had obligations or responsibilities. It will, for instance, consider when the year I opened my first account, as well as the combined average of all my credit accounts.
Having a lengthy credit history can be advantageous as long as the history is not one that has been marred by sporadic, missed, and late payments. On the other hand, a short history can also be handy in instances where I have ensured that all my payments are made on time and that I do not owe too much money.
It is the main reason why many financial experts recommend that I leave a credit account open, even if I have chosen to stop using that particular account or company. The age of the account will, in the long run, help me boost my overall credit profile. If I choose to close all the old accounts, my profile may be negatively affected.
4. New Line of Credit: 10%
My FICO score will also consider the number of new accounts that I have acquired. The score takes into consideration all the new accounts that I may have opened in the past few months or the length of time that has passed since I submitted an application for a new credit account.
A lender will typically carry out a hard pull or a hard inquiry each time I apply for a new credit line. The hard inquiry is mainly used to check my credit information and is an essential part of the underwriting procedure. Note that a hard inquiry and a soft inquiry are two different items. A soft inquiry occurs when I retrieve my own information.
A hard inquiry can occasion a temporary decline in my overall credit score profile. The reasoning behind this being that if I have opened numerous accounts in the recent past, some of which possess higher percentages as compared to their total figures, it means that I could be at an increased risk of missing or not making payments.
Lenders generally assume that the reason why I am opening new accounts is that I intend to take on new debt or because I have some cash flow issues. For instance, when I am applying for car refinancing, the auto loan lender will check my overall debt obligations. This is to help the financier determine the total debt that I can be able to afford on a monthly basis.
5. The Kinds of Credit I Am Using: 10%
The final component that is considered when determining my credit score involves establishing whether I have acquired a combination of different lines of credit, e.g., mortgages, installment loans, store accounts, and credit cards. The system also determines the number of accounts that are in my possession.
Given that this forms a very small factor of my overall score, it means that I do not have to worry about opening accounts in all the categories mentioned. It also means that I will not be forced to open an account in each category just for the sake of combining different kinds of credits.
What Is Not Included in My Score?
According to FICO, the following details will not be taken into consideration when determining my credit score:
- Where I live
- Marital status
- National origin, color, religion or race
- My monthly salary
- The employer, employment history and occupation
- Receipt of public assistance
- Family support/child obligations
- Information that may not have been included in my credit report
- Whether I am taking part in a program dedicated to credit counseling
Note: For the employer, FICO may not consider this, but other scores and lenders may take it into consideration.
What Does All This Mean to Me When I Am Applying for Car Refinancing?
I have come to learn by following the guidelines listed below, I not only get to avoid getting into bad credit but I also get to help improve my overall credit scores:
- If I have some flaws or bad credit score in my report, I should not start to despair. I just need to start making some better financial decisions and with time, I will start to note some improvements.
- I should not open too many credit accounts at a go or within a year
- To make sure that I pay all my accounts on time. And in cases where I am late, the duration should not exceed thirty days.
As much as my credit score will play an important role in helping me get approved for loans, I should not spend too much time obsessing over the scoring guidelines in a bid to ensure that I will get a score that will impress most lenders. For my score to shine, all I need to is to ensure that I manage it well.