Credit is defined as a customer obtaining services or products before payment with the trust that payment will be made in the future. Credit affords people purchasing power they would not have if they had to pay for something outright at the time of checkout. In addition, credit enables men and women to finance expensive automobiles, buy homes or furnish those homes, contributing much to the foundation of a strong economy.
A strong credit history and score is vital to personal finance. The steps people take concerning their finances can greatly affect their credit. Identifying the behaviors that may be detrimental and those that are beneficial can help customers reevaluate their habits and improve their creditworthiness in the eyes of lenders.
The financial advisement resource Credit Karma says one of the most important factors affecting credit scoring is payment history. Having a long history of making payments on time is essential for a strong credit score. Missed payments and a reputation for paying late can drive ratings down. It can take some time to recover from late payments. Failure to recognize late or missed payments may result in bankruptcy or tax liens, which are a heavy black mark on credit.
Credit utilization rate
Credit utilization refers to the amount of credit you have available, based on credit card limits, compared to the amount of credit you're actually using by way of the balances on credit cards, advises the credit tracking company Experian. Lenders prefer to see ratios of around 30 percent or less. To calculate credit utilization rate, divide your credit card balance by your credit limit. So if your balance is $600 and your limit is $1000, that's a utilization rate of 60 percent.
Number of accounts
The number of open accounts you have affects your credit score. Scoring models often look back and consider how many accounts are open and if there are any outstanding balances.
Length of credit history
The length of your credit history is another factor that affects your score, according to Investopedia. Credit scoring takes into account the age of your oldest account, if you've used that account recently, as well as the average age of all your accounts, including the newest. Closed accounts can stay on your credit report for up to 10 years, but when an account closes, this will affect your credit history average. Credit scoring rubrics will determine just how the ratio of new to old accounts and frequency of use will impact your score.
Credit scores are important. Understanding them further can help people secure their financial futures.