Having a good credit is of utmost importance due to it’s adverse effect on one’s ability to borrow money as well as the terms of that loan. This has resulted to many wondering why did my credit score drop. Lenders basically use numbers termed as credit scores to determine ones creditworthiness which tend to be numerical representations in one’s credit report. This means that having a higher credit score is an advantage since it signals to lenders that the borrower have higher chances of repaying the loans as per the agreed terms. Borrowers with a higher credit score benefits from fast loan approval due to there being lenders with minimum credit requirements. There is also a chance to benefit from favorable loan terms like low interest rates. In determination of one’s credit score there are several factors that are taken into account since there is an impact of debt on credit score.
One is the payment history. This is the major factor that has the most significant impact on one’s credit score. Before a borrower approval for financing lenders have to consider this factor. There is an increased drop on one’s credit score by multiple late payments. To avoid the chances of decreasing one’s credit score it’s good for one to ensure that one do not regularly miss payments and even carrying credit balances. Therefore it’s good to avoid missing a loan or credit card payment. However it’s possible to recover one’s higher credit score by making quick payments to such debt given that such late payment stays on report for seven years.
Another factor is credit utilization. It entails the ratio which encompasses the debt one have access to as well as home equity line of credit . Lenders also take into account whether one uses a high percentage of available credit funds given that there is a higher chance of a borrower who frequently owns a lot missing a payment. There is need to keep the balances low since the higher the debt the lower the score tend to be.
Credit history also affects one’s credit score. Credit score tend to be affected by the length of time one has loans and for how long it has been on credit report. This means the longer one had a specific loan it positively impacts the credit score as long as one is in good standing with such credit source. Having a good history of ability to pay loan is the goal of the lenders. Therefore having recent entries on the report does not give lenders a chance to see one’s ability to pay off the loans in the long term.
Lastly is the new credit. Lenders typically look at the amount of new credit that a borrower has when they are applying for financing. It helps see how one shop their credit. Low credit score is brought about by alot of new financing application in a short period of time.