The 5 Factors That Affect Your Credit Score

Updated: June 28, 2022

One of the most misunderstood and misused financial tools is credit. If you know how to use it, then it can help you achieve your financial goals faster. Otherwise, you’ll drown in debt and financial difficulties.

It is a double-edged sword, or as I usually describe it, a power tool like a chainsaw. One careless mistake and you’ll cut off your fingers, but learn to master it and you can create an ice sculpture.

What is a credit score?

Credit is a contractual agreement. It’s a promise to pay back the money you’re borrowing. Meanwhile, a credit score is how lenders determine if they will let you borrow money or not.

Formally, a credit score is a universally-accepted metric or number used to determine whether or not a person is capable of fulfilling their financial obligation. A credit score represents stability, integrity, and trustworthiness.

Thus, the higher your credit score is, then the more likely you can avail of credit.

The benefits of a good credit score.

A good credit score is what you want because it means higher chances and faster approval when you’re applying for a loan.

Moreover, you can also leverage your good credit score to negotiate lower or better interest rates.

And soon in the Philippines, your credit score can become a factor in getting accepted to a job application, as some BPOs have already been doing. And it can also affect how much your insurance premiums will be.

The reality is, that a lot of life’s big purchases like a car or a house, require us to apply for a loan because it will take years if we simply save up for them. Meanwhile, growing a business becomes easier if we have a credit line from our banks and suppliers.

Thus, having a good credit score is important.

The factors that affect your credit score.

According to Ms. Pia Arellano of TransUnion Philippines during our podcast conversation, these are the five factors that affect your credit score.

1. Credit payment history
Do you pay your obligations on time? If you often miss your due date, then your credit score will suffer.

Moreover, it’s essential to understand that for credit card debts, it’s okay if you don’t pay in full. What’s important is to pay at least the minimum before the due date.

2. Credit utilization
How much of your credit limit are you using? If you often max out your credit card, then that’s actually bad for your credit score.

That’s why if you don’t spend a lot on your credit card, it’s usually easier to ask your bank for an increase in your credit limit.

3. Length of credit history
How long have you had credit? How many years have you been an active credit card user? The longer your credit history is, the better.

It is a good idea to apply for a credit card as soon as you have your personal finances in order. Of course, learning how to save and budget comes first. But after that, go ahead and get a credit card with no annual fees.

4. Types of credit you have
Do you have credit cards? Have you applied for a personal loan? Home loan? Auto loan? Have you done installment payments on your credit card?

The more types of credit that you have, the better, because it shows how responsible you are at handling different types of credit.

5. New credit
This looks at how often you open new credit.

When you apply for different loans at the same time or max out multiple credit cards in the same month, then this hurts your credit score because it shows an overeagerness for credit and could be a symptom of financial problems.

How to know your credit score.

Typically, you can inform your bank that you’re planning to get a loan and ask them to check your credit score. However, in most cases, they’ll just tell you if you’re eligible for the loan or not.

If you’re interested to know your actual credit score, then you can request your credit report from TransUnion Philippines here.

What is interesting with the credit report from TransUnion is that you also get guidance on how to improve your financial health. So, do check it out, especially if you’re planning to get a big loan soon.

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