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Factors that Affect Your Credit Score and Extent of Effect of Each Factor

By Ruth Racey
Published: Monday, August 6th, 2012

Each individual should be fully aware of the various factors that affect credit score. Unfortunately, majority of us are blissfully ignorant of the impact of the financial actions that we undertake. Every financial transaction that we resort to results in either enhancing or lowering our credit scores. Hence, it is necessary to understand clearly the impact of every single factor on our credit scores.

Usually, two types of credit scores are available in the United States. The traditional credit score, termed as FICO score, is a product developed by Fair Isaac Corporation. The other score is known as Vantage score. The three main credit reporting agencies, Equifax, TransUnion, and Experian have developed this credit score.

Under FICO, you could achieve a maximum score of 850. The highest credit under Vantage is 1000. If your FICO credit score is above 720, lenders consider it as a very good credit rating and your credit risk is held as very minimal. The higher your credit score, the more you would be able to negotiate better interest rates and other terms of the loans. If your score is between 600 and 720, lenders categorize you as medium credit risk. You would still be able to obtain credit from lenders but the rates and terms that you get could be higher. If your credit score is below 600, lenders would deem you as bad credit. It would be quite difficult for you to obtain credit or loans.

Each financial transaction affects your credit score positively or negatively. For example, you might short-sell your automobile or a property. When this transaction gets recorded in your individual credit report of the three credit reporting agencies, they would lower your credit score by points between 100 and 150. If there is a default on your housing loan, the lender might foreclose your home. This would result in a loss of 150-200 points in your FICO score. If you file for bankruptcy and proceed to Chapter 13, the credit rating agencies consider it as a major financial misdemeanor. They would cut your credit score by 350 to 400 points.

The other factors that impact your credit rating are your age, your employment position, your marital status, your average monthly income, your spending habits, and your repayment promptness. You should not forget that your credit report contains all these details. Lenders consider these factors also while determining your credit credibility. On many occasions, your actual credit score might be lower but if there are positive aspects in the above factors, lenders might be willing to consider extending credit to you. Hence, when your credit score is somewhat low, you should highlight such positive factors when you approach the lender. It is not difficult to convince a lender that the drop in your individual credit score was due to unavoidable circumstances that you could not immediately control. If you are sincere in your approach to the lender, even a marginally lower credit score is not a restriction in getting a loan. However, it is necessary that you strive continuously to improve your credit score and maintain it above 700.

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