In life, you may come to a place where you’ll need a loan to boost your financial strength. You may take a personal loan or a business loan. However, before many lenders advance you a loan, they’ll first assess your creditworthiness. No one would like to give out a loan to someone or a business entity that won’t have the capacity to repay. One of the things that financial lenders will focus on to determine your creditworthiness is your FICO score. It’s advisable to maintain a good credit score to stand a better chance of getting a loan whenever you need one.
If you’re planning to secure a loan for your business, you’ll have to present your audited business accounts to your lender and a credit score from bureaus that determine business credit scores. Whether you need a personal or business loan, a strong credit score boosts your chances of having your loan application approved.
For you to know how you can maintain your credit score at the appropriate scale, here are factors that affect your credit score to watch out for:
1. Payment History
Among the top considerations of lenders before giving out any loan is to establish whether the loanee can prove that they’re in a position to honor the payment. For instance, some landlords will ask for your rent payment history before they can rent you an apartment.
To ensure that your rent payment history doesn’t become a hindrance to getting a house in the future, you can partner with rent reporting services. Suppose your credit score isn’t good enough to help you secure an apartment due to unavoidable circumstances in the past. In that case, you can start improving it by registering to rent reporting services, whose work is to report rent to credit bureaus, which helps boost your credit score.
Payment history reflects the following aspects:
- Do you practice timely payment of bills? Late payments negatively affect your score.
- If you’ve done late payments, to what extent were you late? The later you’ll do your payments, the worse will be your score.
- Are there incidents of charge-offs, bankruptcies, lawsuits, foreclosures, wage garnishments, or public judgments leveled against you? Having any of these in your history sends a red alert to your lender.
- When was the last time you missed paying your premiums? Someone who’s missed paying a loan recently would be regarded as a bigger risk than someone who did several years ago.
Some of the loan history aspects that may interest lenders are home mortgage, bank lines of credit, car loans, store credit accounts, student loans, medical bills, and cell phone bills.
2. Amount Owed
Even though you might be paying your premiums well, your lender might want to know your ability to repay a new loan. As a result, your FICO score will be considered against your credit utilization ratio. It’s a comparison of your debt amount and credit limits.
The following will be considered in your credit utilization ratio:
- Amount of credit you’ve used. Having a zero amount doesn’t mean you can score highly. This is because your lenders would like to see a situation where you borrowed money and demonstrated responsibility to pay it back.
- Amounts owed to accounts, such as a mortgage, credit cards, auto loans, and installment accounts. You demonstrate a capacity to repay your loans by having several types of credit and managing them well.
- The total amount of debt owed compared to the amount awarded—the less the loan remaining, the better.
3. Reporting Errors
Errors might occur in reporting and negatively affect your credit score. Occasionally, reporting agencies might surrender the wrong information concerning your credit history and, thus, lower your credit score. An error might arise from typing. Moreover, your account might be hacked where your identity is stolen. Even if your score was good, a hacker might act maliciously, lowering your credit score.
4. New Credit
The FICO score rating also considers the number of new accounts you have and the last time you opened a new account. If you’ve opened many new accounts within a short time, and whose percentage is bigger than the total number, this can be interpreted as a greater credit risk. It might indicate that you’re having cash flow troubles, which is the reason for taking new debts.
Getting a loan isn’t a problem, especially if you want to boost your business experiencing financial turbulence. The issue is to ensure that you manage the loan responsibly to get another loan in the future without a problem. As a result, make it your ambition to honor all your premiums in time to maintain your credit score at the correct level.