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Student Guide to Credit Scores

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If you’re planning to get a job, apply for credit cards, line of credit or any type of loan, or even to get your own utility lines, you need a good credit rating. But, what is credit? Why does it play an important role in our lives? In simple terms, your credit score is the numerical expression of your creditworthiness, based on the entries in your credit file.

You need to present a credit score when applying for a credit card, line of credit or a loan. Potential employers, landlords, car dealers and almost everyone dealing with money look at your credit score to assess your creditworthiness.

Common purposes of Credit Scoring:

  • Determines whether your credit application should be approved or not
  • Used to set your credit limits on credit or store cards
  • Lending rates – the lower your credit score, the higher your interest rates can be

What factors affect my credit score?

Payment History

Lenders want to know if you have been paying your debts on time so they can calculate whether they can get back the money they lend you. Your payment history is a mirror image of your repayment habits. If you seldom miss your debt repayment schedules, it indicates that you can be trusted to repay the funds you borrowed.

If the bills on each account on your credit report have been paid late, your score will go down. How late you are also matters. So, if you missed payments for a few days, the lender will be more considerate to you, than someone who has missed the payment for 30 to 90 days.

Your score would plummet if you’ve not only paid late, but you have accounts that were sent to collections.  Records of bankruptcies, wage garnishments or attachments, judgments on debts and similar negative listings are red signals that can leave negative impressions on a potential lender. And, of course, they are bad for your credit rating too. If you do have bad credit rating, try to clear credit history.

Total debts

How much money do you owe? Even if you made all your payments on time, if you reached the maximum debt you can carry, it will still have a negative impact on your score.  Your credit utilization ratio or the debt you have compared to the available credit limits on your account is a crucial factor that determines your credit score.

If your available credit is $1000 but you used up $900 then your utilization ratio is 90%. That is way higher than the 30% ideal utilization rate. If you want to maintain a good credit standing, don’t use up over 30% of your available credit limit. It will not only be good for your score, but it will also ensure that you are not spending more than you can really handle to repay. You can try debt consolidation with bad credit to combine multiple debts into one, and to lower their interest rates.

So if I don’t charge anything to my credit card, my credit score will increase? No. while it is not advisable to consume your total available credit having a $0 balance on your accounts would not score you with high marks. Lenders would like to see a little bit of borrowed money to know if you can pay your debts responsibly. If you still cannot a loan, you may need to look up Loans for People with Bad Credit.

Credit mix

Credit scoring models would like to see a balanced mix of credit accounts. So, if you only have credit cards and line of credit, it would also help your score a bit, if you can apply for other types of loans such as personal loans, mortgage, car loans and installment accounts. While it is not advisable to obtain debts just for the sake of getting a higher score-having a mix of different types of credit that you can manage responsibly is a crucial factor in boosting your credit rating.

Age of credit

How long have you been using a credit card? What is the age of your oldest account? It’s never too early to open a credit account. Aside from student loans, students can take advantage of low interest credit cards. The credit reporting agencies will compute the average age of your credit accounts, and take into consideration your oldest active credit account.

New Credit

How many new accounts do you have? If you applied for many new accounts recently, your credit rating may go down. Whenever you make an online application for a loan, credit card or a new line of credit, make sure that the lenders will not do a hard inquiry. While it is normal for lenders to check your credit information during the underwriting procedure, online enquiries about a loan product will be so much better. To do a soft enquiry, it is advisable to retrieve your own credit information and submit them to lenders to avoid multiple hard enquiries within a short period of time which will do the opposite of fix bad credit.

If you like to know more answers about “What is credit” make an enquiry today and the Clean Credit team will get back to you shortly.

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