| Bad Credit Score Breakdown |
| By Credit Federal |
Published
08/15/2007
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Financial Tips
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Bad Credit Score Factors
Bad credit is everyone's business.
At one time in history, each person's credit score was important only to them and to their lenders and creditors. Times; however, have changed. Now employers are also interested in the credit scores of their employees. So are insurers, landlords, as well as many others. Each year seems to generate more and more interest in consumer credit scores for determining the reliability of a person. Whether this is right or wrong; good or bad, your score can make an impression. And you want that impression to be good, not bad.
If you have a bad credit score, the reporting agency is thus warning lenders and creditors that you are a high risk. For clarification sake, 'high risk' means you would be more prone to making late payments; or entirely defaulting on a loan, than other people. And it doesn't make any difference what your religion; nor skin color, is, nor your political affiliation. All that matters to creditors and lenders is whether or not you've ever gotten credit is the past and; if so, your history of making timely payments, if you currently have lines of credit, how much and what types.
Not only can being labeled a bad credit risk affect whether or not you get loan approval, it also impacts the terms and interest rate you'll be offered. As a lender's or a creditor's risk increases, so does the interest rate (and/or fees) the borrower will have to pay.
Situations happen. People change. These two additional variables can either work for you or against you, because some lenders and creditors will consider factors such as how long you've been employed, your annual income, the number of years lived at your current residence and the total amount of debt you owe. Let's say; for example, during the last 12 months you had a three month period of late bill payments due to illness which caused you to miss a lot of work. Some lenders may be understanding of these situations and will give you a second chance.
Bad Credit Score Factors
Late Bill Payments - Paying bills late has the most deadly affect on your FICO score, up to 35% of your score. Don't rely on lenders and creditors to send you bill payment reminders. Make it a habit of sending in your payments even before you would receive reminders. Allow extra time for slow mail; holidays, Sundays, mis-routing, etc.
Mega Unpaid Debt Balances - How much debt you owe is the second-most factor, accounting for 30% of your credit score.
Lack of Long Term Credit History - How long you've had a history of credit accounts for up to 15% of your credit score. Be careful when closing old credit accounts which have the longest; and best, history of repayments. Also be careful that you don't close accounts which may lower your total available credit limit, otherwise you may end up looking more maxed out than you really are. Having open credit helps your utilization ratio, which is how much you owe as compared to your available credit.
New Credit - Accounting for 10% of your credit score, new credit refers to applications you've put in recently for new credit, the resulting inquiries, and how many recently opened accounts you have. In most instances when you apply for credit, the lender/creditor may make an inquiry into your credit report and this often counts against your score.
Lack of Credit Variety - The types of credit you have counts for 10% of your score. Having a mix of credit types (mortgage, auto loan, credit cards, etc) will likely produce a better score. But don't take on more debt than you can handle. Paying bills on time earns you more points than does a mix of credit types.
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