How Your Score Is Affected by Debt
How Your Score Is Affected by Debt
When you apply for new credit, regardless of what type of credit it might be including personal loans, mortgage loans, or simple credit cards, your credit score and rating is usually what the lender uses to decide whether or not to extend the credit to you. They also use your credit record to determine how much your interest rate will be. Most people know this, but what they don’t know is that their credit score is figured out from a number of things. It’s not just your past credit history, but your debt as well.
All three major credit bureaus use a standard credit scoring system known as FICO to create your credit score. A credit score is a three digit number which can range from about 300 to about 850.
There are many factors that actually go into creating this credit score.
About one third of your credit score is based on your payment history. If you have had late payments, or you get some payments, or if you’ve default it on any longer credit accounts this will fact the payment history part of your credit score negatively. If you consistently pay all of your bills on time though, even if it’s just the minimum amount to, then this part of your score will look good.
Another one third of your credit score is actually determined by how much debt you have. The amount of debt you currently have is compared to the available credit you have, and the amount of income you make. If you have many lines of personal credit, or even credit cards, that you consistently keep maxed out, this will actually affect your credit score negatively. If you don’t hold too many lines of credit though, and particularly if you keep your balance is low, then this will help your credit score be higher.
The last one third of your credit score is a combination of many different factors. The length of time you’ve actually had credit accounts, how much recent credit you actually applied for, and what types of credit you have in your history all factor into this equation. Generally the amount of time you’ve actually had a credit history carries the most weight in this part of your credit score. Anyone who has a long history of borrowing money and then repaying it on time has a much higher credit score than someone who is only had a credit account for a short period of time. Unfortunately though, if you have recently applied for many types of credit this can lower your credit score.
So simply keeping your credit score any reasonable or high rate, can not only help you get credit easier, but it can also help keep your interest rates lower which in turn keep your overall debt down.
