We need a good credit score to build a reliable financial future. Without it, it will be hard to qualify for credit cards, loans, and other favorable terms and interest rates.
Even if you have no plans to apply for financing, having good credit can help you save money in other ways, such as having a lower monthly insurance premium.
How Your Credit Score Is Calculated
There are two most popular credit scoring models in the US – FICO and VantageScore. About 90 percent of the lenders use FICO for credit decisions.
Lenders, such as CreditNinja, use your credit score to determine the risks of lending money when you apply for a credit card or a loan. Calculating your credit score involves a complex software program regardless of its type. The scoring model also assesses the details generated from your credit report.
Here are the things that can affect your credit score:
- If you have late payments;
- Your experience with a variety of account types (installment credit, revolving credit, etc.);
- The ratio between your credit card limit and existing balances;
- The number of times you applied for any type of debt in the past 12 months;
- The number of years since you opened your first credit account (this determines the average age of your accounts).
Improving Your Credit Score
If you have a poor credit score, the steps to boost it will depend on your situation. However, these tips can help improve almost anyone’s credit.
Build Your Credit File
The first step in building your credit file is to open new accounts that will be relayed to the major credit bureaus. Once you do this, you can start creating a good track record of your credit transactions. It will also help if you have several active and open accounts.
It may include secured cards or credit-builder loans if you are just starting or have a bad credit score. You can also opt to get a rewards credit card that doesn’t charge an annual fee if you’re doing your best to boost an established good credit score. Being an authorized user on another individual’s credit card can also help improve your credit only if they use the card responsibly.
Pay On Time
Your payment history plays a huge part in building your credit score. Having a long history of making on-time payments is a great way to achieve a good credit score. To reach this goal, you’ll have to remember not to miss any loan or credit card payments because late payments are reported to the major credit bureaus and will lower your credit score.
A technique worth considering when it comes to on-time payments is to avail of an automatic payment system. It will help avoid missing or delaying your debt payments. In case you are struggling to make payments, it’s also recommended to contact your lender.
Generally, not keeping your subscription services, gym memberships, and the like up to date doesn’t affect your credit score. However, being sent to collections due to non-payment will negatively affect it.
Keep Your Accounts Current
If you think you’re behind your bill payments, do your best to keep them current. A late payment can stay on your credit report for several years. However, keeping your accounts current can help save your credit score.
Pay Off Revolving Debt
Revolving debt includes lines of credit and credit cards. Remember that a high balance on your revolving credit accounts can result in a high credit utilization rate and a lower credit score. Those with excellent credit scores tend to have a low credit utilization ratio (the ratio between your credit and total debt).
Limit Getting New Accounts
Try to limit how often you present your credit applications. Your application might lead to a hard inquiry, hurting your credit score. Opening too many accounts can also decrease your other accounts’ average age and lower your credit score.
To Wrap It Up
Your credit score is one of the vital records a lender looks at when you borrow money. It can also help determine whether you can get a loan or credit card with the best terms and interest rates. The credit score calculation is based on several factors that show how risky you are as a borrower. So, it’s best to work on your credit score and maintain good credit standing to gain its benefits.
David Prior
David Prior is the editor of Today News, responsible for the overall editorial strategy. He is an NCTJ-qualified journalist with over 20 years’ experience, and is also editor of the award-winning hyperlocal news title Altrincham Today. His LinkedIn profile is here.
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