For financial institutions, a good credit score represents a proof of your creditworthiness. It proves that you're honest, solid, trustworthy and that you're paying your debts on time. Thanks to a good credit score, you can be sure that the bank will grant you a loan and you can also count on better credit terms. The situation becomes difficult when your credit score is low. What can you do to improve it?
Credit Score
A credit score (or rating) is a numerical expression based on analysis of one's credit files. It's a three-digit number, ranging from 300 to 850 (850 is the highest score). Every credit score is based on a credit report, which comes from various credit bureaus. Every rating is linked to his owner's Social Security number.
A high score can provide us with a lower interest rate.
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What Goes Into a Good Credit Score?
A credit score of 700 and above is considered good. To achieve that number you have to be very solid about paying all of your debts. There are also a few other factors that you should pay attention at. Let's check what are the ingredients of a good credit score.
Payment History
Being responsible and respecting deadlines is crucial for your credit score. Pay everything on time, never be late and your credit rating will surely go up. Remember that late or missed payments will affect it badly.
Credit Card Utilization (CCU)
You should always try to use only 30% of your credit card limit. If you can use less – it's even better. If you won't reduce the percentage of the limit you are using, your credit card balance will be determined as high and your score will drop down.
Length of Credit History
The sooner you start to build your history, the better. Having long and wide credit history upgrades your score. Of course, it's also crucial to pay all these debts on time.
Number of Credit Inquiries
A safe number of new hard credit inquiries are 3 or less. Applying for too many accounts in a short period of time will affect your rating badly.
What Makes a Credit Score Bad?
There are also some mistakes you should avoid if you want to be sure that you will get your loan and be provided with a lower interest rate. Let's check what affects credit rating badly.
Paying Your Instalments Late Or Not Paying Them At All
As you already know, 35% of your credit score is your payment history. Every delay in repayment will affect your rating and if the delays are frequent, it will drop down quickly.
The worst is when you don't pay your debt at all. What will happen if you quit paying your credit card bills? Your account will be charged off and that status ruins your credit score.
The same happens if you don't pay off your loan. Loan defaults are as bad as credit card charge-offs.
High Credit Card Balances
A level of your debt is another important factor which impacts a credit rating. It is measured by credit utilization. If you have high credit card balances, your credit utilization goes up. In consequence, your credit score becomes lower.
Applying For Several Credit Cards Or Loans
An amount of credit inquiries also affects your score. It will surely drop if you make several loans or credit card applications in a short period of time.
Tips To Improve Your Credit Score
Is it possible to improve your credit score? Of course, but it's not easy. You have to respect the following rules:
Check Your Credit Report
Errors happen, so you need to check your credit report once a year. Another threat is, of course, an identity theft. Check your credit report regularly to detect that kind of mistakes and react properly.
How to access your report? Once a year you can request a free copy of it from every one of three major credit reporting bureaus.
Pay Your Debt On Time
As it was already said: being on time with your repayments is really important. Every delay affects your score badly. Not paying your instalments at all can seriously damage it.
Pay Your Bills On Time
You should not only pay your debt on time but also your bills. Some bills don't get reported to credit bureaus when you pay them on time, but if you don't – they will surely go there.
Delinquent payments can have a really negative impact on your score. It includes even small library fines!
Watch Your Credit Card Balances
High credit card balance makes your credit rating lower. If you want to keep it good, your credit card balance should be within 30% of your credit limit. Why is that bad? Card issuers report the balance when your statement closes. Even if you pay it off on time, high balance at the moment of closing of the statement will affect your score negatively.
Remember, that loan balance and lines of credit also affect the level of your debt.
Leave Old Debt On Your Report
A debt that you have paid on time is really good for your credit score. Leave good accounts on as long as possible.
Having a good credit score is crucial to be granted a loan, to count on better credit terms and lower interest rates. Respect all the rules which were mentioned above, repay your debts on time and you won't have to worry about your credit reports.
Author: Olga Gierszal
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