The short answer is your credit history. Three credit agencies (TransUnion, Equifax and Experian) track a large amount of data tied to your credit history, and the credit story this data tells factors into your credit score. This credit score plays a critical role in whether or not you’re approved for credit and has a significant impact on the loan offers that you receive.
Lenders and creditors that you do business with may report to one or all of the credit agencies. No creditor is required to report to all three credit agencies, and this is why the formula each agency uses can be different, and credit scores can differ slightly between credit agencies.
What could affect your credit score?
The actual credit score algorithm is a closely guarded secret, however some factors are understood to have impacts on the score.
Credit account history
Your credit score takes into account your complete credit history. One component in determining your credit-worthiness is the length in months of your open credit accounts, and your payment history on those accounts. Someone who has never had a credit card is not accumulating a long-standing history of either good payments or bad payments on their accounts.
If your debt-to-credit ratio is high, that could affect your credit score. Your debt-to-credit ratio is the amount of debt you have against your current credit ceiling across your credit accounts. So, if you have $44,000 in available credit across all of your credit accounts, and you have $22,000 in debt, your debt-to-credit ratio is 50%.
Mortgage, rent, car loans
Your credit score can be affected by the amount of installment loans you have, and your ability to make payments on time for those loans. By paying these loans off consistently, you can build a good credit history. Missed payments can stay on your credit report for up to 2 years.
Your credit score can be negatively affected by late or missed payments, or accounts where you have a serious derogatory (delinquent) payment. So, that bill you refused to pay for lost cable equipment (but that you did not dispute), can affect your ability to obtain credit in the future.
If you have filed for bankruptcy, the bankruptcy will appear on your credit report for 7-10 years, depending on the type of bankruptcy you filed under (i.e chapter 7 or chapter 13).
Too many credit requests (AKA too many hard inquiries or hard pulls)
Hard inquiries are credit inquiries where a potential lender is reviewing your credit because you’ve applied for credit with them. These include credit checks when you’ve applied for a mortgage, credit card or a personal loan for debt consolidation. Each of these types of credit checks count as a single credit inquiry.
A soft pull is a credit inquiry that does not affect your credit score. For example, checking your rate through Prosper results in a soft inquiry that will not affect your credit score. A hard inquiry will only occur once you accept an offer and formally request a loan through Prosper. Similarly, if you have received a pre-approved offer through the mail, a soft pull has likely been made that should not impact your credit score.
Checking your credit score/credit report
Your credit score is an important part of your financial health.
Luckily, checking and monitoring your credit score is easy. Many of the major credit card companies allow you to check your credit score on a regular basis, so you can see if it’s rising or falling from month to month.
If you’d like to get your credit report from credit agencies for free, you can do this once each year by going to annualcreditreport.com. The credit reports are basic, and include a list of your accounts and payment history, and any actions or decisions on your report, such as delinquencies or bankruptcies, but likely will not contain your score.
The good news is that the longer you maintain a satisfactory credit history with accounts that are paid on-time, the better your credit report looks to potential lenders.