It’s hard to improve your financial situation when you have low credit. A good credit score gives you access to better housing opportunities and lower interest rates. Your credit score could even impact which kind of car you can rent or lease.
Understanding your finances is crucial to improving your circumstances; therefore, you need to know the different factors that can affect your credit score. With this knowledge, you can make better decisions about your spending habits.
Derogatory Marks
Your payment history is one of the most important parts of your credit score. Paying bills on time shows lenders that they can trust you to honor your debts. However, you will get derogatory marks on your credit report when you pay things late or let bills go to collections.
Derogatory marks stay on your credit report for a long time. And even though declaring bankruptcy can save your home from foreclosure, it will negatively impact your score for seven to 10 years. That’s not to say you can’t bounce back; taking care of bills that have gone to collections and making timely payments will help your score increase.
Credit History
Another factor that can affect your credit score is credit history. Lenders want to see that you have a good track record, and the more diverse your report looks, the better. Credit cards, auto loans, student loans, and other types of accounts will make you seem like a well-rounded borrower.
The age of your credit also matters. It’s better to have an older credit history, as this lets lenders know you’re not new to the game. Your history age is an average of all your accounts; while opening a new account will change this number, this doesn’t mean you shouldn’t try to diversify your report.
Hard Inquires
Opening up a new line of credit usually triggers a hard inquiry on your report. This shows lenders that you’ve recently added a new account. Typically, hard inquiries have a negative impact; however, they don’t pull too much weight if you’re strategic about it.
Don’t open too many new accounts at once—doing so will tank your score. You should also consider timing. For example, don’t open a new credit card right before applying for an auto loan.
Knowledge is power, especially when it comes to finances. Don’t let your credit score hold you back from a brighter future. Now that you know what affects your report, you can take steps to raise your score and improve your situation.
