Credit scores are essential for getting accepted for any type of loan that you may need. Lenders use credit scores to judge whether or not you will be able to pay back your loan and set an interest rate for you.
A credit score is a number that ranges between 300 and 850 and indicates a customer’s creditworthiness.
So what exactly is a good credit score? It would be best if you aimed for a higher score, making you less likely to get accepted for a loan via lenders.
Credit Score Basics
Instead of wasting their time looking at loan applications and judging by your “looks”, whether you are to be accepted or not, lenders prefer credit scores. It is beneficial to both lenders and borrowers as there is no discrimination, and the latter, on the other hand, can distinguish well from bad borrowers.
Credit scores can affect your financial life as you could have a credit score of 700 and receive a loan with a lower interest rate. Here are how 300-850 scores are rated as:
- Excellent: 800-850
- Pretty Good: 750-799
- Sound: 670-749
- Satisfactory: 580-669
- Poor: 300-579
Having a lower score does not necessarily mean that you can not get a loan. The only difference is the interest rate will be higher. So why not aim for a higher score while you can?
Factors For Credit Score Calculations
There are three different credit reporting agencies that track credit scores. They are Experian, Equifax, and Transunion., They use five main factors to evaluate a credit score.
Total Amount Owed
This is an essential factor as lenders often look at whether you CAN pay back your money. If you are in debt, it is considered risky for a lender and often gives a higher interest rate depending on how much you borrow. This takes up 30% of the credit score.
Payment History
Yes, they look at your payment history and how often you are late for them. Lenders want to know CAN you pay back your loan on time. This takes up 35% of the credit score.
Length Of Credit History
An essential factor as often younger people tend to be riskier than people who have a more extensive credit history. It takes up 15% of the credit score.
Number Of Accounts Open
How many accounts do you have? When was your recent account open, and how many have you applied for? This takes up 10% of the credit score.
Type Of Credit
This considers all credit cards and different types of loans you may have gotten and replayed back or are repaying. This takes up 10% of the credit score.
How To Check Your Credit Score
It has generally become much easier to check credit scores, especially with online sites and apps that offer it as a free service. Many credit cards and banks have started offering free credit scores just for being a customer.
You could also use an application like CreditKarma and others, which offer free credit scores with a free sign-up. CreditKarma is by far a fantastic superior app, and I would recommend giving it a go. Let me know in the comments below if you like the app.
The question you may be asking is, why do I need to know my credit score? Firstly, because there are errors in your credit scores, you could get corrected, in turn getting a higher score.
Secondly, you can get a sense of an idea of whether you should apply for a loan right now or wait until your score increases some way or the other. However, if you need the loan as an emergency, you should try using your emergency fund instead.
How To Improve Your Credit Score
Credit score keeps changing whenever the system gets new information, and it will keep changing. These changes can lead to significant changes in your credit scores, improving your score to get a better loan at a reasonable interest rate. That is the aim.
Pay Your Bills on Time
Let us start with payment history. You have to start paying your bills on time for at least six months so that you can see a change in your score. The longer that you can pay your bills on time, the better your credit score will be.
If you struggle with paying your credit cards or bills on time, set a reminder notification a few days before they are due. Even better, try to pay them as soon as possible in the month to give you some extra time.
Leverage Your Credit Cards
Utilize your credit cards better and try to stay out of debt. Credit cards are hard to use, and often we overspend and tend to go into debt. This does not in any way mean to close your credit card account.
If you close your credit card account, your score will be affected by an enormous amount of succumbing to all the hard work you did. Try to stop using it, or if you do, be smart about it.
Utilizing your credit card is often tricky and hard to apply in real life, but if you do not, then it may affect your credit score negatively. This also does not mean that you completely stop using your credit cards, making them dormant. Banks or credit card companies sometimes see this as a sign and reduce your credit limit, which means a lower credit score.
Increase Your Credit Limit
Increasing your credit limit for your credit cards is a good way to improve your credit score. One of the factors for a higher score is using a small percentage of your total credit.
Sounds easy, right? It is a brilliant idea. Call up your credit card companies and inquire about a credit increase (this does mean your account should have a good standing and no debt, by the way).
Once you get accepted, do not spend the amount as credit scores often use the credit limit to judge your credit scores.
Find and Fix Any Credit Score Errors
Fix credit report errors, which banks often make while reporting. This can affect your score as well. Credit agencies can make mistakes. Maybe they think you were late on a payment when you actually weren’t.
Errors in your financial history could lead to a lower credit score. If you leave erroneous information on your record, it could affect your credit score negatively.
To prevent this from happening, review your completely free credit score regularly. If you see something out of place, or a sudden change, reach out to your financial institutions to get it straightened out.
Conclusion
Credit scores are an integral part of your financial life and can save you much money. Please take advantage of it and get excellent scores to get lower interest rates.
Lenders also have to assess the risks, so you have to be smart about getting accepted by a lender. Improve your credit score to get the best interest rates for your loans.
It is as simple as that. Let me know in the comments below what you think.
