The Most Important Factors Which Influence a Credit Rating

The Key Financial Components Which Determine A Credit Rating

Your credit rating is influenced by many different factors. It can move up or down depending on your financial habits. Do you pay your bills on time? Are your credit cards at their maximum limits or do you keep a small balance and pay it off each month? All of these circumstances go into determining your credit score. By knowing what information is used to formulate your credit rating, you can take an active role in ensuring that your rating remains at a good level or begin taking positive steps to improve it.

There are certain factors which have a beneficial effect on your credit rating. Paying your bills on time and in full is one of the most important things you can do to maintain a good rating.

Also, most financial experts agree that you should only use about 25% of your available credit. This means that if you have a credit card with a $5000 limit, your outstanding balance should not exceed $1250.

Normally, longer credit history, the better your rating. Financial advisors suggest not closing the older accounts, even if they are paid off. Use them each month for a small purchase and then pay the balance off in full every month. This can have a very positive effect on your score.

Another positive influence on your credit report is steady employment/ steady income. People with a stable job situation are considered less of a risk by lenders.

Just as there are beneficial factors which determine your credit score, there are also circumstances which negatively influence it.

Late or missed payments are extremely harmful and tend to make potential lenders wary of your ability to handle new credit. Remember that every creditor you have reports to the credit bureaus every month on your payment habits. Outstanding medical bills, parking fines- these all can be reported and influence your score.

If you are using more than 80% of your total available credit, this also raises a red flag to creditors and has a negative impact on your score. This amount of outstanding debt indicates you might be experiencing financial hardships, such as a job loss or significant cut in salary.

Unfortunately, the past few years have had a devastating event on the average American’s economic situation. Many consumers have numerous credit cards that are all at their credit limits due to the fact they are used for everyday necessities, such as food, gasoline, and medical expenses. This has caused many people’s credit ratings to drop considerably.

Bankruptcy also can lower your credit score significantly. Whether it is a Chapter 7 discharge where all of your debt is eliminated (with a few exceptions) or a Chapter 13 discharge where your debt is restructured to be manageable, bankruptcies remain on your credit report for up to 10 years after discharge.

Similarly, liens (such as state or federal tax liens) and foreclosures can have a dramatic, negative impact on your credit score.

If your credit report shows a large number of inquiries, it can appear to creditors that you are actively searching for new lines of credit. Many times, this is a sign of someone in financial distress.

By understanding what factors influence your credit rating, you can take an active role in strengthening your financial position and monitoring your financial health.

To find the answers to more of your financial and credit questions, go to Credit FAQs.