APR: How Is It Determined

A credit score is a number that lenders use as basis to determine their risk when a borrower loans money from them. Mortgage banks, credit card companies and auto dealerships are just some of the kinds of lenders that require credit checks before deciding how much they are going to lend you and the interest rate of the loan. Even employers can check your credit to see how responsible you are.

Since your credit score is what determines your APR, let’s take a look how it is calculator.

Factors That Affect Your ScoreAPR

Credit scores shows if a person has a good history of financial stability and responsibly manage debt. Credit scores range from 300 to 850. The higher the score, the better the person is in handling their financial situation. The three major credit bureaus are Equifax, TransUnion and Experian. Each of these agencies may report different scores but all should similarly reflect how a person manages their credit history.

History of Payment – 35%

This is the most crucial factor that affects credit scores. Paying bills on time helps build and maintain a person’s credit score because it shows the lenders the ability of a borrower to manage credits in a responsible way. Besides showing whether your bills are paid on time or not, the history of payments also show bankruptcies filed and any collections. Having these negative factors will considerably lower someone’s credit scores. If you can’t pay bills on time, contact your lender right away to check if you can make a special arrangement in order to be able to repay your debts.

Utilization of Credits – 30%

Credit utilization simply describes the percentage of credit available that has already been borrowed. For borrowers that max out their credit cards, lenders regard them as people who can’t handle their debts responsibly. As a borrower, you should always try to maintain low credit card debts. Experts advise that to achieve good scores, you should have an average credit utilization ratio of not more than 6%. Utilization of credits is measured exclusively by card.

Length of Credit History – 15%

The length of time you have been able to pay your credit accounts also has an impact on your credit score. A long credit history gives more information about the owner and offers a better view of their financial behavior. To improve your credit score, keep accounts open even if you don’t use them often.

New Credit – 10%

Applying for new credit is crucial when some wants to build their credit history but the initial act may temporarily affect their credit score. When applying for a loan or a new line of credit, an inquiry is first done on your credit report (called a hard pull) to tell that the lender has reviewed your information. Hard pulls will cause small temporary decrease in one’s credit score because the score assumes having a lot of inquiries and new accounts might be a sign of greater credit risk. Hard pulls makes it look like the person is depending too much on debt to sustain finances. Minimize the times of applying for new credit within 12 months. You should also avoid opening too many new accounts and applying for new loans at once.

Types of Credit in Use – 10%

The different kind of credit accounts open has is another factor that affects a person’s credit score calculation such as store accounts, credit cards, mortgages, auto loans, student loans and other installment loans. It also determines how many total accounts a person has.

Experts suggest that it is better to have access to more than just one kind of credit account. This is because it will show that an individual is responsible in handling multiple types of credit. A mix of different credit accounts will help you achieve a better credit score but be sure to only open credit accounts that you really need.

Guidelines To Maintaining a Good Credit Score

Follow these guidelines to help you improve and maintain a good credit score:

  • If you have a bad credit score and have a lot of mistakes in your credit history, don’t panic. Start making good financial choices and you will see improvements in your score.
  • If you are planning to make an expensive purchase such as purchasing a house or car, check your credit score in advance. This will give you the advantage of correcting any possible errors and to know what your APR should be.
  • Pay debts on time. Don’t be late in paying for more than 30 days.
  • Avoid opening multiple new accounts at once in a 12 month period.
  • Be aware of your credit utilization ratio. Keep your balances below 10% of your total available credit

Keeping your credit score is essential for you to get approved for your loans and getting the best interest rates that are available. But you don’t need to be too preoccupied on the scoring guidelines to have a good score that the lenders would want to see. Just manage your credit accounts responsibly and your credit score will shine on its own.

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