When you request a loan or credit, a lender will have to look for your credit score at a glance. Therefore, how your credit score determines your financial health greatly.
Your credit score determines your credit trustworthiness. This is determined by analyzing your credit history and credit report. It will be only accessible for lenders to approve your loan request if your credit report is positive and convincing. However, if you suspect that you have a bad credit score, things are discussed in this article to move from one category to the other. Doing so can save you lots of money on an auto loan and improve your insurance premiums.
What is a credit score?
A credit score is a summary of numerical figures bearing your credit history. It is what lenders use to determine your chances of repaying fully a loan they had made to you. Generally, credit scores range from poor to excellent, with poor rated 300 and perfect ranked 850. Having a higher credit score means that your credit history is good and features long credit history, timely payments, and low credit utilization. Lower and poor scores illustrate that you pose a risk as an investment, maybe because of extended use of credit or late payments. While there is no exact red line for poor or excellent scores, most lenders usually value 720 and above scores and despise 630 and below scores. You can be viewed as an ideal or problematic creditor, depending on your score. As an intelligent consumer, you need to be aware of ways to increase your credit score.
The FICO credit score is the primary determinant of your credit score and is used by many lenders. It determines how much loan you can be offered and the respective interest rates to be charged. It uses the following components to equate your credit score:
- Payment history – it’s scored 35%. It looks at on-time payments, paying the balance in full.
- Amounts owed – it’s scored 30%. Using 30% of the allowed credit or fewer warrants a positive rating.
- Length of credit history – it’s scored 15%. Owning an account for long wins the trust of lenders.
- Credit mix – it’s scored 10%. When equating your credit score, a combination of auto loans, credit cards, and mortgages may make FICO improve your score.
- New credit – it’s 10% of the score. Having a new account is good. Just don’t borrow several versions, as this will reflect on your score and reduce it.
As it is commonly said, “time will tell,” so does your credit score. As time goes by, it fluctuates and is determined by repaying debts on time and installment loans. Your frequency of using a credit card, maybe by taking a student loan or mortgage, reflects your responsibility of handling more debt.
How to improve your credit score
Improving your credit score starts by knowing your credit score. Fortunately, you can find your credit score in many places that offer free credit scores, credit utilization ratio, and free credit reports. One of them is the Discover Card which is similar to FICO. Other similar available credit platforms include Chase and Capital One, which shows you a Vantage Score. The information reflected on your vantage score and credit score is obtained from the three major credit reporting bureaus – Equifax, TransUnion, or Experian. You can also try free platforms like Credit Sesame. Once you have your credit, it may come with little surprise that it is lower than expected. However, you can use the following tips to move from bad credit history to a better one with a good credit score.
1. Develop your credit file.
Developing and building your credit file is an essential step, and you can do so by opening new accounts. A report will be sent to major credit bureaus, major lenders, and credit issuers which will help you start laying down a good foundation as a borrower. Signing up for Experian Boost also adds a positive utility to your credit file.
2. Don’t postpone payments.
Lenders usually look at your payment history as it is an excellent determinant of your credit score. Avoid missed payments by making payments on time which will lead to a credit score increase. It will help if you don’t allow your income to extend by more than 29 days. Delaying your payments past 30 days can harm your credit score, and the report can be sent to the credit bureaus.
3. Review your credit report.
You can request your credit score from the three agencies. Every account holder is entitled to one free credit report annually. Closely review Fix any credit issue you notice by disputing errors available. If there is any outdated or wrong information on the report, notify credit reporting agencies. This will improve your credit score once the incorrect information is fixed.
4. Create payment reminders.
It will be best if you can jot down payment deadlines for each bill in a calendar. You can also set up online reminders. Consistent on-time payments of every account can increase your credit score within a short time.
5. Clear out balances.
Your credit utilization rate shows how to use your available credit balance. The amount you owe against your credit limit gives the measure of credit utilization rate. Getting a credit limit increase can improve your credit score. However, it would be best if you were very careful before asking for it.
6. Get credit monitors to track your progress.
You can track how your credit score changes with time by registering with any credit monitoring service provider. Most of these agencies offer free services, and they include TransUnion, Equifax, and Experian. These agencies also come with the added advantage of preventing fraud and identity theft.
Having a good credit score can save you lots of money, especially with an auto loan. Lenders determine your credit trustworthiness by looking at your credit history and credit score. In addition, setting up payment reminders and building your credit file can improve your credit score.
Rose Rosie is a writer for the personal finance website, Joy Wallet, which provides readers with useful information, resources, and tools to help maximize their financial fitness.