You probably know your credit score plays a vital role when applying for a personal loan or a mortgage. However, what lowers it is the real dilemma. Some lenders approve your loan application, but the terms will not do you any good. You will probably get a high interest rate, increasing your monthly payments. 

Lenders look at your credit score to find out your borrowing reliability. Borrowers with a low DTI ratio are considered less risky because their credit report shows they are responsible with their finances. As a result, lenders offer them multiple loan options with high capital amounts.

Having a low credit score does not mean you are irresponsible. It depends on your circumstances, such as whether you are still paying your student loan or a business loan you took out for a small venture that failed. Every borrower makes mistakes, and that’s why they end up in debt.

The good news is that there are plenty of ways you can help improve your credit score. Before we discuss the top three things that impact your credit score, let’s take a look at what makes up the number:

Factors That Make Up Your Credit Score

Your credit score tells the lender your history of financial stability. It ranges from 300 (Poor) to 850 (Excellent). A Good credit score of 670 allows you to secure a loan with a low-interest rate. The following factors make up your credit score:

Payment History: 35%

• Late payment details.
• Credit card repayments.
• Foreclosures, bankruptcies, liens, and lawsuits.

Amounts Owed: 30%

• Balance owed.
• Available credit.
• Debt.

Credit History Length: 15%

• How long have your credit cards been in use.
• When did you open your credit card accounts.

New Credit: 10%

• Number of recent inquiries.
• Opening new accounts.
• When was the last inquiry made.

Types of Credit: 10%

• Types of credit card accounts.
• Number of credit cards you have.

3 Factors That Affect Your Credit Score

1. Paying Your Bills Late

Whether it’s your electricity bill or a monthly loan payment, the more delays you make in paying it, the more your credit score will fall. Lenders usually offer a grace period of 30 days. However, when the late payments become regular, they might be forced to report it to a credit reporting agency. 

It’s important to make the payment as soon as possible because if it is marked as default, a negative marking will appear on your credit report, which will further impact your credit score. Moreover, this marking makes a lender think twice before approving your loan application.

2. Not Making a Budget

You are probably wondering how having a budget can help you maintain your credit score. Well, it’s pretty simple. 

You must align all your expenses and ensure they fit into your DTI ratio. That way, you can identify which expenses can stay and which ones must be eliminated.

3. Not Keeping Track of Your Credit Reports

Even after you have paid your bills, a negative mark appears on your credit score. When a lender makes a hard inquiry into your credit report, they assume you defaulted on a payment and deny your loan application. As a result, your credit score falls because you have no idea that your credit report has a false negative marking.

This is why you need to check your credit report annually to ensure no discrepancies. If you find any, inform your credit reporting agency immediately and provide them with proof so the mistake can be fixed.

Our final advice: Remember to make your payments on time, and you won’t ever see a dip in your credit score.