What are the Key Factors in Credit Scoring? Credit scoring is one the strategy used by financiers to evaluate the potential risk by lending cash to a certain borrower and to mitigate losses due to uncollectible loan. Credit scoring is done before deciding to approve your loan and at what interest rate. Credit Score determine whether you have a history of financial viability and trustworthy credit management.
We already know the meaning of credit scoring but what are different factors that affect individual credit score? Let us now begin to discuss the key factors of Credit scoring.
Key Factors in Credit Scoring
There are five factors that affect your score which are listed below:
- Payment History
Payment history is the most important factors in credit scoring. A financer has one question in their minds during lending. This is: Will I be able to get it back and earn a profit on it?
This component of credit score considered if you paid your past loan on time or not. Late payment has a negative impact to borrower’s score. The impact of your score will depend on how late you paid your account. Is it 30 days, 60 days or 90 days onward past due? The later you were, the worse it will be on your score.
Another consideration of payment history is if your account has been turn to collection or did you ever experience any bad public records such as bankruptcies, lawsuit or public judgement? These are red flag to all potential financier and these will establish the most menacing marks on your score.
- Loan Amount
The amount of loan is one of the factors that affect your credit score. Credit scoring considers your credit utilization ratio, which measure how many debts or how much debts do you have compared to the value of all your assets limit. The financier wants to see if you borrow cash, you are responsible and financially stable to pay it back your loan in the future.
- Length of your Credit History
Your credit score is affected by the length of your credit history. The financier will look on the age of your oldest and newest account, the average age of all your account. A long credit history is beneficial as long as you did not incurred late payments and other negative thing. A short history is still great as long as you pay on time.
- Types of Loan
The financier consider also in calculating your credit scoring the types of credit you are using whether you have mix types of credit such as instalment loan, store account and mortgages. This factor is just a minor factor.
- Recent loan
Financier may review your credit reports and scores when you are applying for a new loan. This is known as loan inquiry which can stay up to two years on your credit reports. The financier will inquire if how many new accounts have you applied for commodity financing. This is done by soft or hard inquiry which is done before they approve your loan.
Some financiers verified too the other information such as your marital status, age, salary, occupation, address, members of the family and any information not found in your credit report. So if you are going to apply for commodity financing and other loan, make sure to indicate all the information with veracity.