Although it isn’t that complex, the use of credit cards is beyond spending a lot, purchasing goods, borrowing cash, and paying loans. It also has its pros and cons. And for many reasons, cardholders may still be unaware and are confused about using theirs.
For those who haven’t gone through the guidelines, you may have wondered what credit scores are and why it is important. Penny Saved has collected all the things you ought to know about it. Along the way, you’ll learn most of the information you need to take note of.
Understanding What a Credit Score Is
A credit score is a number between 300 and 850, denoting a consumer’s creditworthiness. This model was made by FICO and is used by financial institutions.
It is the one lending companies use to help them determine how likely it is they will be repaid on time if they grant a borrower of credit cards or loans. It is based on your credit history, which includes the number of open accounts, total levels of debt, repayment history, and many other factors.
Lenders use credit scores to evaluate the probability that a person will repay loans in a timely manner.
As it is an important part of your financial status, the higher your scores are the more chances of qualifying for your demands at favorable terms. People with credit scores below 640 are usually considered to be subprime borrowers.
Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage to compensate themselves for carrying more risk. They may also mandate a shorter repayment term or a co-signer for borrowers with a low credit score.
A credit score of above 700, is frequently considered good and may allow a borrower of receiving a lower interest rate. While scores of over 800 are easily considered excellent.
It’s revealed that a person’s credit score may also define the amount of an initial deposit needed for you to get a gadget or other utilities, even to rent an apartment. Normally, lenders review borrowers’ score, especially when deciding whether to change an interest rate or credit limit on a credit card.
How Credit Scores are Being Calculated
There are three major credit bureaus that keep track, report and save consumers’ credit histories. While there may be discrepancies in the data gathered by the agencies, there are factors evaluated when computing a credit score.
It can be your payment history, revolving credit, debt, or the total amount you owed with your account, the duration of your credit history, types of account, and how often you apply for new credit.
Factors That Influence Your Credit Scores
1. Payment History
To thoroughly keep track of your credit scores, consider how calculated credit scores are a major factor. It’s reminded that a payment history counts for at least 35% of a credit score and reveals whether one pays their obligations promptly. Note that even 30-day late payments or missed payments can have a negative impact.
2. Credit Utilization
The total amount owed counts for 30% and takes into account the percentage of credit available to a person that is currently being used. It is called credit utilization.
3. Credit History Length
The duration of credit history scores for 15%, with longer credit histories being deemed less risky because more information is available to check their records.
4. Credit Mix
The type of credit used is said to count for 10% of a credit score. It suggests whether one has a mix of installment credit, from mortgage loans to revolving credits.
5. New Credit
On the other hand, new credit sums for 10%, and it factors in the number of new accounts a person has, the accounts they have really applied for, which result in credit inquiries, and when the most recent account was opened.
6. Public Records
Public records such as bankruptcies or civil judgments also impact your record. Negative information on your credit report immediately lowers your credit scores. These, particularly, are the ones you should be aware of.
Reasons to Improve Your Credit Score
Credit scoring involves many complicated calculations. The more you know about how credit reports work and how credit scores work, the more you are able to take control of and handle your own credit. As it is already a given that a cardholder must obtain a good record, there can be specific matters that would convince you to maintain a good credit score or achieve a high credit score.
1. Increase Chances of Getting Your Loan Approved
It can be for a mortgage, car loan, credit card, or another credit line. A positive credit score increases your chances of being approved for your demands.
2. Qualify for Higher Loan Amount and Lower Interest Rates
You can easily qualify for lower interest rates with a higher credit score. It will also be essential should you decide to refinance an existing mortgage, student loan, or other types of debt to qualify for a new, lower interest rate.
3. Get Access to Better Deals
You may also choose to keep your good track record, if you have already applied for, and been denied a line of credit to improve your existing credit scores.
Furthermore, with a good credit score, a consumer can make significant savings on bigger deals, access to more of the best credit cards, plus insurance discounts, even housing options, and security deposit waivers on utilities.
Steps to Improve Your Credit Score
Before you plan on improving your scores, check your account beforehand. As you get your scores, you will have the data about which factors and errors are impacting your records the most. These risk factors will better help you understand the changes you can make to start improving your scores. You may need to allow some time for any changes you make to be reported by your creditors and subsequently reflected in your credit scores.
Be aware that some credit score factors could be more important than others. Pay history and credit utilization ratios are among the most relevant in many critical credit scoring models, and they can collectively represent up to 70% of a credit score, which is proof the figures are highly affecting.
Listed below are the easy ways you can do to effectively improve your credit score:
1. Make Frequent Payments
Assuming you have had a hard couple of months with your finances. Maybe you needed to rebuild your deck or buy new furniture, even a property. Putting big items on a credit card to get the rewards can briefly lose your utilization ratio out of blow.
Do a payment two weeks before the closing date and then make another payment just before the closing date. This, of course, suggests you may have the money to pay off your big expense by the end of the month. However, it’s highly encouraged not to use your credit card for a big bill if you plan to carry a balance.
The compound interest will build an ugly pile of debt easily. Credit cards should not be used for long-term loans except you have a card with a zero percent introductory APR on purchases. Even then, you have to be responsible for the balance on your card and make sure you can repay the bill before even the period ends.
2. Ask for Higher Credit Limits
Note that if you struggle with overspending, do not attempt to do this. This option allows you to raise your credit limit on one or more cards so that your utilization ratio falls down.
However, it only works out in your favor if you don’t feel compelled to use the newly available credit. It’s also discouraged should you have missed payments with the issuer or have a downward-trending score. The issuer could see your application for a credit limit increase as a sign that you are about to have a financial crisis and demand the extra credit.
Double-check whether your situation looks stable before you seek an increase. Rest assured, as long as you’ve been a great customer and your score is reasonably strong, it is a good strategy to work on.
3. Dispute the Credit Report Errors
Always remember the need of checking your credit reports from all the three credit reporting bureaus for any inaccuracies. False information on your credit reports could immediately drag your scores down. Verify that the accounts listed on your reports are correct.
If you see a mistake, dispute the data, and have it corrected right away. Keeping track of your credit on a regular can help you spot errors before they can even make damages.
4. Keep Your Old Credit Cards Open
Keeping extra credit cards open, assuming it does not cost you money in annual fees, is a great option. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account as it could potentially increase your credit utilization ratio. If so, owing to the same price but having fewer open statements may lower your credit scores.
5. Mix It Up
As crazy it may sound, it helps, especially for a longer-term strategy. Your credit mix is only 10% of your FICO score, and often times that little bit can bump you up from good credit to excellent credit instantly.
6. Pay the Bills on Time.
This always serves as a huge factor. Remember that lending companies check your credit report and request a credit score for you. They are keen on seeing a responsible cardholder because past payment performance is considered a good predictor of future performance.
As expected, failing to pay before due time or settling an account for less than what you first agreed to pay can negatively impact credit scores. We suggest if you are behind on any payments, bring them current as soon as possible. It can still be visible on your credit report for seven years, but older late returns have less effect than the current ones.
7. Use Credit Monitoring to Track Your Progress.
This approach can assist you to identify and correct errors and inaccuracies, thereby improving your credit score. When a person applies for any kind of credit products such as loans or credit cards, the banker will evaluate the applicant’s credit report.
It is followed by hard inquiries, which are shown to other lenders, as they may represent new debt. It’s urged that everyone should check their reports at least yearly as part of good credit management and avoid potential bankruptcy.
8. Make the Most of a Thin Credit File.
Just in case you do not have a credit score because you have a little history with credit, it’s possible that you have a thin credit file. It suggests you have few credit accounts listed on your credit reports, typically one to four.
Basically, a thin file means a bank or lender is unable to calculate a credit score because there is not enough information in a customer’s credit record to do so. You can fatten up your thin credit file by applying for a secured credit card, or becoming an authorized user on someone else’s credit card, or taking out a credit builder loan.
What to Do If You Don’t Have Credit Scores?
If you want to establish your credit but don’t have a credit score yet, the following options can help you get started:
1. Become an Authorized User
This method allows you to use someone else’s credit card in your name. You can make purchases and use the card as if it were your own, but you’re not tagged as the primary account holder.
To make you an authorized user, the primary account holder simply adds your name to their credit card account, giving you permission to have it. Although you won’t have all the privileges of the primary account holder, you will receive a credit card joined to the account.
Keep in mind that if the primary account holder has a strong history of on-time payments, it can have a positive impact on your credit. Furthermore, if the account’s credit utilization rate is low, it can also be beneficial for your credit. If the primary account holder, however, misses a payment, your credit will also be at risk leading to a severe negative impact.
2. Use a Secured Credit Card
The two most important factors in your FICO credit score are your payment history and your credit utilization. As you use a secured credit card regularly and make your returns promptly, you establish credit history through building payment history.
While you tend to maintain your balance at a reasonable level, the lower your credit utilization is, the better. It’s revealed that as you use your secured credit card over time, it will also heighten your length of credit history. It contributes nearly 15% of your FICO credit score.
How Long Does it Take to Rebuild a Credit Score?
Delinquency: seven years; bankruptcy:10 years, multiple inquiries: two years.
Repairing credit score differs depending on your situation and record. If you have had negative information on your credit reports, like overdue payments, a public record item such as bankruptcy, or multiple inquiries, we encourage you to pay your bills and wait.
It’s revealed the length of time it takes to rebuild your credit history after a negative change varies on the reasons behind the change. Most negative differences in credit scores are because of the addition of a negative element to your credit reports- could be a delinquency or collection account.
Remember that delinquencies remain on your credit report for up to seven years. Most public record items remain on your credit report for the same duration, although some bankruptcies may stay for at least a decade. Meanwhile, inquiries could rest on your report for two years.
On the other hand, it’s difficult to say precisely what you need to do in order to improve your credit score just by 100 points. As well as exactly how long it will require, or rather if it is even possible. It’s likely you may already be within 100 points of the best score possible on the scoring system you are using.
What are the Things a Cardholder Must Never Forget
Like many complicated things, restoring your credit and improving your credit scores won’t be that easy as hoped. It may take a lot of time and effort. However, the answer is to always consider getting your credit score.
Penny Saved recommends you start improving your credit by checking it firsthand and evaluating the factors that may have influenced your record. Focusing on these areas will help you realize the specific changes you can make to your credit history to fix your record and rating as quickly as possible.
You may also seek assistance from experts to learn more about conditions on how to effectively raise your credit score.
It’s vital to recognize the idea of being a responsible cardholder as it affects your financial life. Your credit scores could immediately reflect where you will be in the future.
Bad records could lead you jobless or homeless. Thus, ensuring you observe your credit behaviors and are keen on meeting the deadline before it even comes, guarantees the best results.