Let’s begin on understanding what credit is.  A credit score is a statistical number that evaluates an individual’s credibility.  Businesses use credit scores to determine the likely hood of a consumer repaying their debts.  So, in other words and to simply put it: Can I trust someone to pay back the $100k that I will lend them?  Of course, the amount won’t always be at an exuberant number, but your credit score will always be taken into consideration when applying for credit. 

Now that we know what a credit score is used for, we can move into a person’s actual score or levels of “creditworthiness”.  A consumer’s credit can range anywhere from 300 to 850.  At times some people may have no credit.  In terms of your credit rating, the higher the number on the spectrum, the more financially trustworthy that person is judged to be. Meaning if you handle your debt responsibly, the higher your score will be.  The lower the number, the less trustworthy you’re considered to be.  The reason for a low score can involve many different factors.  Which we will be explained later in the article.

If a person doesn’t have a credit score it is most likely because they’ve never borrowed money before, which can be considered both good and bad at times.  If you’ve never borrowed money from a lender, there’s no way to base how trustworthy a person is without some form of past history.  Would you judge a newborn child’s ability to walk - No! Because they’ve never walked before!  It’s the same idea.  If you don’t have any credit or if you have bad credit, we recommend applying for the Horizon Gold Card.  A great way to improve your credit score- apply now for instant approval no matter what your credit score- www.horizoncardservices.com

Moving forward with an understanding of what a credit score is and the levels of credit, we can discuss what impacts your credit score.  There is a plethora of factors that affects a person’s score, including, but not limited to:

1. Amount of debt and utilization
2. Age of your credit accounts
3. Number of credit accounts
4. Credit Inquiries
5. Payment history. 

Let’s begin with payment history.  The number one question to ask when taking payment history into consideration is “Are you making your payments on time?”.  This is very important.  Any payment made past your due date is considered a late payment and will affect your credit score in a negative way.  On-time payments will prevent negative impacts and can potentially improve your score or at least maintain it. 

A credit inquiry is anytime a lender reviews your score when you apply for any form of loan or credit card. There are two different types- a soft or hard inquiry.  A soft inquiry doesn’t affect your credit score.  It’s simply an informal way of checking your credit score to see if a person is pre-qualified.  Soft inquiries usual pertains to background checks, savings/checking accounts, or simply checking your credit score in general.  On the other hand, a hard inquiry involves a more in-depth review of your credit score.  It determines whether or not an individual qualifies for the loan or credit card they’re applying for.  A hard inquiry will affect your credit score in a negative way.  The more hard-inquires a person has the more damage it will deal on your score.  Hard-inquires usually last up to two years on a person’s credit report.  Therefore, with time, they will gradually be removed, thus improving your credit.

In regard to the number of credits accounts- the more accounts you have open, the better it looks on your credit report.  This is because being able to manage multiple debts owed at one time reflects good management habits.  It also reflects a high level of responsibility, showing that you’ve been trusted and approved for multiple loans and/or credit card accounts.  Keep in mind when any credit account is closed or a loan is payed off, this will drop the number of accounts a person has.   

One factor that must be taken into consideration which coincides with credit accounts would be the average age of your accounts.  When viewing the metrics of length of your credit history, most models will review an individual’s oldest account, newest account, and the average age of total accounts open.  For example, if a person has a credit card for 10 years, but opened a new card 1 year ago, then your average age of total accounts would be calculated as such: (10 years * 1 year) / (2 total accounts) = 5.5 years average age, considering said person only has 2 credit accounts.  Usually accounts open for 4 years or less are considered bad.  Accounts open for 5-7 years are considered average.  Accounts open for 8 or more years are the best.  Tip for maintaining positive average age of credit: DO NOT CLOSE YOUR OLDEST CREDIT ACCOUNT. 

The last factor that will be discussed is credit utilization.  Credit Utilization is considered to have a very high impact on your credit score, second to payment history.  Credit utilization is determined by comparing your available credit to the amount of balances you owe.  Point of view: Let’s say someone has 3 credit cards.  Each credit card has a $5,000 balance.  This means your total available credit is $15,000 (5,000 x 3).  Now on 2 out of the 3 credit cards you owe a balance of $3,000 on both.  This would total for a balance of $6,000 (3,000 x 2).  So, from this information we can determine the credit card utilization by dividing the total balance by the available credit: $6,000 / $15,000 = 40%.  On average, keeping a credit card utilization at 30% or below is highly recommended.  Maintaining this average can help your credit score immensely. 

By reviewing all of these factors and taking each of them into consideration any individual should be able to manage their credit score effectively.  Be careful and be aware of all aspects of your credit score so that you can take control of your life.  Use this information to prevent yourself from being turned down for credit!