Credit scores can be confusing. Considering how important they are in getting approved for a car loan, we thought we would quickly break it down into the 5 areas that affect your score.
1. Payment History
Paying your bills on time is a huge part of maintaining a good score. Your payment history details any instances of late payments, write-offs, liens for unpaid debts, and if you have ever been sent to a collection agency. Even your cell phone and utility bills are now included in this portion of your score. Failure to pay these debts is reflected negatively on your score, even though they may be small in amount. Bankruptcies and the use of debt management services to repay debt is also included here.
2. Debt Ratio
Your debt ratio looks at the amount of debt you current owe, whether it’s a credit card, mortgage, car loan, line of credit, or other types of loans. But higher debt does not necessarily mean that that you are a bigger risk. In some cases, have some debt is considered a good thing for your score.
Things your credit score considers for your debt ratio:
Available credit
Your outstanding balance
Credit utilization rate (having a low balance relative to your maximum credit is considered a good thing, but your phone or utility bills can also be considered as positive credit if paid off on time regularly)
Percentage of accounts with balances (i.e. having multiple credit cards with balances is an indication of a high risk lender)
How much you own on a loan compared to the initial loan amount (i.e. showing you can pay off an installment loan would be an indicator or responsible credit use.)
3. Credit History
This looks at how long you have been using credit. Even if you have only been using it for a short time, you can still have a positive history if you have shown responsibility in all the other areas.
4. Type of Credit Used
The type of credit you have used in the past will also be reported. Payday loans may report payments to your credit report, but they are generally less positive for your score than mortgages or car loans.
5. New Credit
Your score will not suffer if you apply for credit, nor if you request a copy of your report. But repeated applications for new loans that are turned down can have a negative affect on your score. New credit can, however, re-establish your score by making payments on time with these new loans.
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