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A credit score is a powerful number that can impact your major life decisions. It is a financial figure used by lenders to determine your creditworthiness. This aspect is of great importance, as it helps lending institutions ascertain whether there is any risk associated with lending you money. Any lender, be it a credit card company, bank, mortgage banker, or auto dealer, will surely check your credit score before making a decision regarding your loan approval.
The significance of credit scores doesn’t end there with approval or rejection, as it also helps financial institutions decide the amount of money they can let you borrow as well as the interest rate to be charged. Other than this, even landlords, employers, and insurance providers often look into credit scores to check how financially responsible you are as a borrower before letting you rent their apartment, offering a job, or issuing an insurance cover to you.
Finally, even credit card companies examine credit scores before they approve your credit card application. While different firms have different requirements for providing credit cards, the usage of credit scores to decide about their customers is common among them. Generally, all utility companies investigate your credit score before signing you up for a new service. Does all of this seem overwhelmingly complex?
Do you feel like you have to do extensive research in order to figure out what affects your credit score? Fret not! It’s not all that complicated and can be grasped easily in a few minutes. Keep reading to know more about what credit score is and what affects it the most.
Credit scores are numbers typically falling in the range of 300 to 850. There are several factors that could impact this score, and lenders are cautious of this number to establish how promising is your ability to repay your debts. As a consequence, these scores play a massive role in whether or not you will get a loan.
Once your financial position changes, it is reflected in your credit scores. You will be at a great advantage if you understand what factors affect your scores, as this ability will allow you to improve them over a period. Both protecting and building your credit are immensely vital these days. Consequently, how you deal with the below-mentioned factors will have a significant impact on keeping your credit scores within a desirable limit.
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Here is what affects credit scores the most in UAE:
When anyone thinks about lending money, perhaps the first aspect they wonder about is whether they will get it back or not. Payment history is among the biggest determinants of your credit score, contributing to 35 per cent of your total credit score. It determines whether you can be trusted to pay your funds back or not, and considers the following factors:
This refers to the amount owed by you, and accounts for 30 per cent of the credit scores. FICO, a major analytics software company known for producing consumer credit scores that are used by financial institutions before deciding whether to issue a credit or not, gives considerable weightage to the credit utilisation ratio. This ratio measures the amount of your debt compared to the credit limits available to you. The following factors are taken into consideration by this component:
Another essential aspect, this contributes about 15 per cent to your credit score. The financial authorities take into account the period for which you have been utilising credit. The number of years you have had the obligations are important. Apart from this, how old is your oldest account and the average age of your accounts is just as important.
Having a long credit history is advantageous as long as it is not marred by any negative events like late payments. Even a short credit history is not bad if you have been regular in making payments and don’t owe much debt.
This is why experts suggest that you leave your credit cards accounts open even if you are not using them anymore. Losing your accounts will immediately cause your credit scores to decline. On the other hand, the age of your accounts will boost your score immensely.
This makes up to 10 per cent of your score. The FICO score tends to take into consideration how many recent accounts you have. This includes both the new accounts that you have recently applied for as well as the last time that you opened a new account.
Every time that you apply for a line of credit, lenders make sure to investigate or do a hard pull to cross-check the credit information supplied by you during the underwriting process. If you do not get approved during a hard pull, it can cause a temporary decline in your credit scores. This happens due to the fact that people tend to open multiple new accounts when they have a scarce cash flow or if they decide to borrow more.
Notably, FICO also takes into consideration all the hard inquiries made as well as any new line of credit availed in the past 12 months. It is, therefore, advisable to minimize your applications for new lines of credit in one year. However, it should be noted that this does not include rate shopping, as it implies that they simply rate shopping and are not actually planning to buy a new car or take a new insurance policy. At the same time, avoid excessive searches to keep your credit score unscathed.
Making up 10 per cent of your total score, FICO's calculations to determine the credit scores consider the different types of credit acquired like credit cards, instalment loans, mortgages, or store accounts. Having such accounts in the credit report signifies that one has proper experience in managing different types of credit, proving to be better for one’s credit score.
It will be even better if one has availed of loans for several assets like home loans, car loans, credit cards, and so on. These are called installment loans, but not having these is not devastating for credit scores as they form a minuscule part of the total score.
As this is a small part of credit score evaluation, you need not worry if you do not have accounts in these categories. One doesn’t have to necessarily open new accounts or take unnecessary loans just to increase the diversity of credit types.
This is generally linked to credit cards, although some home equity debts are also included as revolving credit. These credit accounts offer a credit limit while making a minimum monthly payment based on the amount of credit used. These accounts tend to fluctuate and don’t have a fixed term.
This type of credit consists of loans that allow you to borrow a certain sum of money while agreeing to make monthly payments until the loan is completely paid off. These credits include personal loans, student loans, and mortgages.
These include phone bills and utility bills that are not included in the credit file by default. The only way for a utility account to impact credit scores is if one did not make payments which caused the account to be forwarded to a collection agency.
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Certain aspects of your credit can positively or negatively affect your credit score. The things one needs to be cautious of include -
Here is how you can improve your credit score.
Credit scores prove vital in getting a loan approved or getting the most favourable interest rates. However, one need not obsess over them in the expectations of an ideal score that will get you brownie points from the lenders. As long as you manage your credit with some discipline, your score will be credit-worthy.
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