Credit history is an important attribute of a successful financial life. Hence, it is very important to know what exactly constitutes it and produces an impact on your credit score. There are several significant factors which are taken into account while calculating your credit score.
1. Length of Credit History
Creditors like when a credit history is established and maintained for a certain period of time. It gives them an opportunity to track your behavior in the course of time and understand the risks so the faster you start building your credit history, the better outcomes you would achieve. It is highly recommended to start this process at the student age. Besides, it is very convenient because a lot of lenders and credit card providers offer specially favorable conditions for students.
2. Quantity of Credit Lines
If there are very few credit lines on your file, it is more difficult to predict your future payment performance and calculate all risks. Besides, if other lenders believed in you and gave you credit, it is a positive sign. There should be a reasonable quantity of credit lines sufficient to showcase your payment habits and convince future editors that you are a low-risk client. It is generally recommended to have 1-2 revolving accounts, a couple of installment accounts, one mortgage and auto loan.
3. Credit Limits on Existing Credit Lines
Higher limits on your credit lines indicate that other lenders have certain trust in you. Nowadays lenders are much more careful with credit and do not grant high credit lines or increase credit limits without significant financial prerequisites. It is a signal to the future lenders that you are trustworthy and can be considered a good client.
4. Credit Payment History
It is one of the most important factors influencing your credit history. Credit payment history gives lenders an opportunity to see how responsible you are and if you execute your financial obligations. Poor payment history including delinquencies significantly worsens credit history and immediately lowers your credit score. Even if you forgot to pay on time just once and, for example, got 30 days late, this credit line becomes a negative account and drags your score down. You should always remember about payments dates and billing cycles on different accounts and deliver payments right on time.
5. Presence/Absence of Derogatory Notes
Derogatory notes (e.g. collections, judgments) worsen your situation and influence your credit history in a very negative way. It is very important to avoid placement of these notes on your credit files and resolve proactively all financial problems associated with them. Derogatory notes indicate that you are a problematic client who may potentially default on new financial obligations.
6. Credit Utilization.
Credit utilization is associated with debt-to-credit ratios and available credit. This aspect is very important for establishing and maintaining good credit. You should not use more than 30% of your credit limit because it will automatically downgrade your credit score. It is much better to have several credit lines and use no more than 30% of available credit than have one credit line and exploit it heavily.