Bygones are not bygones in the world of banking and finance. What you do in the past, always comes around and determines the course of the future for you. In the world of credit, your worth is determined by a magic number called a Credit score. This is a mathematical way of expressing the creditworthiness of a person who is applying for credit approval. A credit score is determined by taking five elements into consideration.
- Amount you owe
- Length of time you have been using credit
- The credit mix you have
- New credit accounts you open
- Payment history
Every element has a different weightage when it comes to evaluating your credit score. However, your credit history takes the big chunk of it and has the most significant impact.
The first thing a creditor looks at is your credit history, to get an idea of whether you are good at keeping up your end of the bargain or not. Whether you made the payment at a time or not.
The type of accounts, which the creditors consider when checking your credit history, are;
- Primarily your credit card.
- The retail accounts you have.
- All the installments that are due every month including your car installment or any appliance you got on installments. And how regularly you pay them.
- Your history with other financing companies.
- Your mortgage payments history.
Your credit history is like a report card that a creditor sees. If he sees that you have made late payments, it will not immediately affect your score but if there are late payments for consecutive months, you will have to face some consequences and those consequences will then have an affect your credit score.
First, you will be charged with late credit fee. Then your interest rate will be increased. That increased interest rate is never a good sign. It shows that they have reservations when it comes to trusting you with credit. It will also make it more difficult for you to stick to credit then because it will become more expensive and therefore increase the risk of late payments or no payments at all. This stays on your report for a significant amount of time, maximum for seven years.
Other than this your credit score is also negatively affected by any foreclosures you have against you, any lawsuits that were filed against you, wage garnishments, or if someone has withheld any of your property till the time you pay them off. These all factors are also taken into account including bankruptcy in any form as well.
Credit history constitutes 35% of your credit score, thus a good credit history guarantees that you have a good credit score and more options of credit available to you. A low credit score lowers your credibility as it implies the presence of unfavorable information on your credit report.