4 Factors Credit Bureaus Consider When Calculating Your Credit Score

May 11th, 2021
4 Factors Credit Bureaus Consider When Calculating Your Credit Score

Most people are aware that their credit score plays a big role on their life and finances. Unresolved financial issues leading to a bad score virtually guarantees challenges when it comes to whether or not you are approved for loans, the interest rate you pay on those loans and even whether you can get insurance, jobs and more. For many, the wide ranging and true impact of a bad credit rating only becomes apparent after they have ended up with one. At that point, they realize how difficult, and expensive navigating your day to day life with a bad score makes many things. 

That being said, most people are unaware of how their credit score is determined. Credit scores, or credit ratings are based on many factors. In this article, we will talk about four of the more common ones credit bureaus look at when calculating your credit score. 

Your transaction history

One of the most important factors any credit bureau looks at when calculating your credit score is your payment history. Everything from whether you paid previous creditors in full, did you pay your debts on time and were there any lapses in payment, etc., can all affect your credit score.  

However, your transaction history is not the only thing they look at. Other things like ongoing loans and any other debts you have will also be considered and affect your current score. 

Your credit history length

While not as important as the previous factor, your credit history length is also something credit bureaus are keenly interested in. The longer the length of payment history you have, the more comfortable credit ratings are with you. 

Credit bureaus adhere to the thought that the past is indicative of the future, so if they can look back and see several years (or decades) of payment history, they can better asses whether you are likely to pay your debts consistent and on a reliable basis. Unfortunately, and perhaps unfairly, many financial institutions and credit bureaus view someone with little or no credit history as a risk and can be viewed equally as bad or worse than someone with a poor credit history and score.  

Your amount owed to creditors

How much you currently owe to creditors will also be taken into consideration. If you want to borrow more money, any and all current financial obligations naturally need to be looked at first. 

When looking at your current debt obligations, lenders are trying to determine if you can handle the additional debt. They will look into everything from your mortgage, vehicle payments, credit card balance levels, credit lines and pretty much everything they can. If the bureaus feel you are extended too far financially, this can negatively affect your credit score and your ability to borrow money at the moment. 

Your current applications for money

The more applications you have made trying to borrow money, the bigger the red flag for creditors and the potential for them to treat you as a higher risk borrower. So if you have made several applications for new credit cards, credit lines or any other loans, the credit bureaus will likely know and it will negatively impact your credit rating accordingly. As far as credit bureaus are concerned, numerous applications suggest you may be struggling for money, making you a high-risk borrower, and as such, can significantly drop your credit score. Know that as a rule, just the simply act of applying for loans can negatively impact your credit score. 

Conclusion 

In short, the above factors are some of the key things credit bureaus consider when calculating your credit score. If you are trying to improve your credit score, we recommend you try to review the above points and keep them in your mind as you build your plan.  For example, if you think you have too many applications for money, start lowering how often you are applying, or if you know your credit history is filled with missed or late payments, you can start fixing it by paying your current payments on time and in the right amount. While it takes time to repair and boost your credit score, it will pay off in the form of more loans available to you, and at lower interest rates, which will help you save plenty of money in the long run. 

Paul J. Pickering and Associates Limited specialize in debt counseling, Consumer Proposals, Bankruptcies and offers help to individuals in London on how to manage and provide relief from their financial troubles. Work with us today and improve your financial situation!