Your credit score is basically a report card on how you handle money and your overall financial health. It’s a 3-digit number that financial institutions use to determine how likely you are to pay back any money they lend you. A good score gets you more credit opportunities, as well as great interest rates on car loans and mortgages. A weak score can end up costing you much more for both.
In the US, credit scores generally range from 300-850. A credit score of 720 and above is generally considered good, while one below 620 is considered poor. This number is generated by the Fair Isaac Corporation (FICO) using data collected from various credit reporting agencies in the US such as Equifax. To arrive at your score, they consider the following:
a) 35% of your score is based on your debt payment history. This has the largest impact on your credit score so if you want to maintain a good credit score, pay your debts fully and on time.
b) 30% of your score is based on your credit utilization. The less available credit you use the better. Avoid maxing out your credit cards.
c) 15% of your score is based on the length of your credit history. The longer, the better since it shows you are trustworthy and reliable when it comes to paying debts.
d) 10% is based on the type of credit. The more diverse your loans are, the better.
e) The last 10% is based on new credit. Avoid opening several new cards in a short period of time.
How Your Credit Score Can Affect You
When you are applying for a loan from any financial institution, the only thing they can rely on to determine whether you are creditworthy is your credit score. As such, financial organizations must ask for your credit report when deciding if to give you a loan, how much to lend you, and at what interest rates.
Having a good credit score means more financial institutions are willing to lend you money and also increases your chances of getting you charged lower interest rates on your loans. A low credit score may deny you opportunities of securing any form of financing. Most banks reject loan requests from people with credit scores lower than 620. If they approve your loan, you will most likely be charged higher interest rates than someone with a good credit score.
Most insurance companies also take your credit report into consideration when determining your insurance premiums. If you have good credit scores, your premiums may be lower.
How to Improve Your Credit Score
We all make mistakes, especially when we are young. You may have damaged your credit score as a result of a few mistakes and bad decisions. Luckily, there are a few things you can do to make amends such as:
- Pay All of Your Bills on Time
The biggest factor that determines your credit score is your payment history on your past loans. Lenders are likely to reject your application if you have a history of missed payments and late payments. According to credit score analysts, a single missed payment can lead to a credit score drop of about 100-300 points.
- Only Apply for a Loan When You Need it
A lot of people make the mistake of applying for multiple loans as part of their research when looking for credit. It’s a common mistake as many people see it as a great way to compare different lenders’ terms in order to choose the best. What they don’t realize is that every time they apply, they are shaving points from their credit score as each inquiry is saved on their credit report. Making too many inquiries in a short period of time is a sure way to send your credit scores south. Instead, do your market research before settling on a lender.
- Manage the Debts You Have
If you want to boost your score, you have to keep your balances low. The amount of available credit you use should be kept as low as possible. According to experts, always aim to keep your balance lower than 30% of your credit limit. If you are carrying balances on your credit cards, come up with a plan to pay them off as soon as you can.
- Own Your Credit Profile
One of the best ways to improve your credit scores is by having an active credit account. If you don’t have a credit card, consider getting one or two but keep in mind to use it responsibly. Keep it active by using it to make small purchases every month then paying it off.
- Review Your Credit Report Regularly
Check your credit score at least once annually and review it carefully. Ensure all the information is accurate and up-to-date. Check for any errors or unusual activity on your credit report and report the ones you get back to the credit agency.
For more information on improving your credit score, feel free to contact me!