When it comes to financial identity, your credit score holds all the power. A number determining your future opportunities should sound neither far-fetched nor scary, as this article is here to break down all things “credit”.
So, why are credit scores so important? Well, higher scores are likely to deem you eligible for loans and credit cards, while lower ones prevent you from acquiring those at the most favorable terms. In fact, while getting a loan, lower credit scores might end up costing you far more in the long run due to high-interest rates. Applying for a mortgage, getting a decent car loan, and saving money for a getaway trip fly out the window too. Not to mention, potential employers might peek at your credit report in the application process and refuse you a dream job based solely on your score. Need I go on?
Primarily, when you have a good score, it presents lenders the lower rates they desire to lend you for both short term emergencies and longer-term loans. It is in your best interests to keep those numbers up!
What’s A Credit Score?
The first step in improving your credit score is an accurate understanding of what it represents. Imagine a number between 300-800 which showcases your financial responsibility. Introducing a brand-new meaning to the phrase “strength in numbers”, your score is a snapshot that lets lenders know how creditworthy you are. Built on your credit report and history (a measurement of one’s ability to repay debts), your credit score also plays a crucial role in the interest rates you are offered.
How Is A Credit Score Calculated?
While there are slight differences in credit score calculation depending on the agency you’re using, there are still five main factors you should know about using the information on your credit report.
- Payment History
- How Much You Owe
- Credit History and Length
- Mixed Credit and Their Types
- Recently Opened Accounts and New Credit
Consistency is key in improving your credit score, and here are some steps to get you there:
Pay your bills regularly and on time. A lender is quite likely to look at how regularly you pay your bills and make assumptions about your reliability. If you’re conscious about your credit score (which you should be), you will create and stick to a monthly fixed schedule. This does not only apply to your credit card bills. Utilities, student loans, and phone bills all apply. Set those calendar reminders and start boosting your credit score.
If you are already paying your utilities and phone bills on time, there is a way to incorporate that into your credit score using Experian Boost. Visit experian.com/boost to learn more about this.
Don’t forget about credit utilization. The amount of available credit limit you use is your credit utilization. It’s a percentage, and a potential lender is likely to fancy a lower one (ideally 25% or lower).
Check for fraudulent activity. Study your credit carefully for things that don’t apply to you, and contact your credit reference agency immediately. It happens more often than one might think.
If you have an unused credit card, don’t close it. Unless they come with fees, unused credit cards are a good tool to have. Closing an account can result in an increased credit utilization ratio, and this is not good for your credit score. If you owe a certain amount, it is better to have multiple open accounts in your rotation.
Don’t open a new account just because. While the above point applies to accounts that are already open, a brand-new account won’t do much to improve your credit score. It might bring up unnecessary credit that does more harm than good.
Pick and choose who you’re linked to. Joint accounts with friends, relatives, and spouses with lower scores affect yours too. If a higher credit score is what you crave, it might be time for an awkward conversation.