Why?
Any time credit is reported, the following things are taken into consideration:
- Age of the account
- Your total limit as well as your outstanding balance
- Payment history
- Type of account
When you open a new line of credit, a loan, or a credit card (basically any type of account where you are borrowing money and then paying it back), it affects the overall “age” of your credit and this is why you may see a dip in your credit score at first. As you begin to build up your repayment history and increase the age of your credit, your credit score should reflect that.
Sezzle is just one piece of your overall credit puzzle, so there may be other things affecting it as well. For more information about the benefits of a new line of credit, why your credit score is important, and how credit scores work, check out the articles below.
The Benefits of Your New Line of Credit
Although you may see a slight decrease in your score in the short-term, a new line of credit will boost your credit profile over time—a must-have for the future.
A better track record. Paying on time every time is essential for good credit. FICO, the credit score used most for credit decisions, says payment history accounts for 35% of your total credit score. Competitor VantageScore calls it “extremely influential.”
If you’re trying to build credit, nothing is more important than consistent, on-time payments. A new account gives you another opportunity to build up a record of on-time payments.
More room on credit cards. Credit utilization is also an important factor affecting your credit score. Credit utilization is simply the percentage of your overall credit that you are currently using. A new card will increase your overall credit limit. If your spending stays the same, your overall credit utilization will be lower, which could help your score over time.
Credit diversity. Credit scores award points for showing you can manage more than one type of credit. If you have an installment loan but do not have a credit card, successfully managing a new credit card is likely to help. But if you already have several credit cards, adding one more is not as likely to have as much of an impact.
Why Your Credit Score Matters
Lenders use your credit score to determine your creditworthiness. Your credit score affects whether you get approved for credit cards, loans, mortgages, and auto loans, and influences the interest rate and terms lenders may assign you upon approval.
Insurance providers, landlords, and employers may also review your credit score when you apply for a new policy, an apartment, or even a new job. In these cases, a good credit score helps indicate your overall trustworthiness and responsibility.
How Credit Scores Work
FICO and VantageScore are the two main credit scoring models. These models calculate your credit score using information from your credit report, which is provided by the three credit bureaus—Equifax, Experian, and TransUnion. Because of this, your credit score will vary across different scoring models. Lenders choose which credit scores to use when determining your creditworthiness, and some scores can even be specific to an industry or loan type.
In general, five main factors determine your credit score: payment history, balances owed, age of credit history, credit diversity, and recent activity. Of those, your payment history and balances owed have the biggest impact on your FICO credit score.
