Credit Cards

What To Know About Your Credit Score And How You Can Improve It

An individual’s financial situation is one of the most important things in the modern world. Access to most essential services, like apartment leasing, bank loans, and money lending institutions in general, depends on the creditworthiness of a person. Records of how you transact money and whether you are a trustworthy debtor are collectively known as your credit score.

In most countries, businesses and service providers require you to prove your ability to repay what you owe others before selling you services or goods on credit. To do this, they will review your credit score to approve or deny you their services. Based on this, it is in your best interest to maintain a high credit score.

How credit score is calculated

Good or bad credit depends on a person’s financial history. According to CNBC, three financial tracking institutions keep record of your financial transactions. These institutions are Experian, Equifax, and Trans Union. Financial tracking companies use either of two methods to calculate where you stand as a borrower. The two methods are FICO (Fair Isaac Corp) method and Vantage Score method.

Your credit score is usually a 3-digit number provided by the financial institutions that produce reports for your credit score. There are conventional ranges that are used to classify you as having excellent, very good, good, fair, or poor credit. The credit score rating ranges from zero to 850. The conventional ranges of classification are as outlined below:

  • Excellent: 800 and above
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 579 and lower

Factors considered when calculating credit score

To determine an individual’s credit rating, the financial tracking companies take into consideration a variety of factors. Each of these factors carry a specific weight in the function used to calculate the credit score.

Payment history

The most important consideration that is taken into account is an individual’s track record in paying what he or she owes. Bills range from utility bills, rent, lease payments, or payment for consumer goods and services. Prompt payments boost your credit score while late payments affect it negatively. Payment history accounts for 35% of your credit score.

What you owe

When dealing with finances, it is possible for one to find himself or herself in debt. Financial companies compare what you owe against what you have as credit. A positive debt to credit ratio, therefore, lowers your credit score. In the same way, a negative debt to credit ratio will improve your credit score. 30% of your credit score is based on this debt to credit ratio.

How long you have been taking credit

The amount of time since you began borrowing and repaying money is also taken into consideration when calculating your credit score. Borrowers who have always taken and repaid money within the agreed upon timelines have better credit. On the other hand, borrowers who started borrowing and repaying recently might be considered a risk. The length of time you have been borrowing and repaying account for 15% when calculating credit score.

Diversity of creditors that you have borrowed from

The number of creditors that you have borrowed from is also considered when calculating credit score. A diverse borrowing portfolio indicates that you can manage the different terms that come with each agreement. Having borrowed from multiple lending institutions and being able to pay back, therefore, improves your credit score. For creditors that you defaulted on, a negative impact is reflected. Diversity of borrowing has a weight of 10% when calculating your credit score.

Recent credit

The number of times you have borrowed recently also influences your credit score. Many applications for credit within a short time raise a red flag because it often paints you as a struggling borrower who is unable to keep up with his or her debts. Opening many accounts also shows how cunning the borrower is because it shows that he or she uses one loan to repay another loan. To improve your credit rating, it is advisable that you allow a time interval between trying to open new borrowing accounts after a rejection. Moreover, make a habit of repaying loans borrowed before you apply for new ones. The most recent credit will affect your credit score by 10%.

Tips of improving your credit score

Having a highly rated score is beneficial to anyone. A high credit score means you will often get good loan terms and enjoy a fast approval rate for your credit card applications. Some of the ways that you can improve their credit score include:

Pay in time

Have a habit of making payments when they are due to improve your credit score. Utility bills around your home, rent, and lease payment agreements should be paid as soon as they are due. Moreover, make sure to inspect your credit card and loan agreements to ensure you can keep up with their monthly repayments. Where possible, negotiate for favorable repayment terms that you can afford in the long run.

Don’t close on credit cards

Avoid maxing out credit cards and closing them. Keep using your credit card for a long period to avoid losing your accumulated financial history. This happens when you close it.

Ask to become an authorized user

You can better your credit score by becoming an authorized user to the account of a person who has good credit. Ask one of your family members who have been doing financial transactions for long and has maintained good credit to add you to one of their accounts. This could improve your credit score especially if you are young.

Make a habit of taking credit

To build good credit score, make a habit of borrowing frequently and from different institutions. A wide borrowing history builds your reputation as a trustworthy person. In addition to borrowing regularly, ensure that you keep up with the repayments plan of any credit that you take in order to avoid negative listing.

Review your credit score rating frequently

The three financial institutions that track financial records for individuals are able to avail your credit report annually. As such, make a habit of checking this report at least once every year. If you find any anomalies that may be negatively affecting your score, raise the issue with the institutions and ask them to correct it.

Limit your borrowing

Ensure that you maintain a debt to credit ratio that does not exceed 30% of your listed assets. Credit card companies can increase your credit limit upon request. As such, ensure you do not borrow an amount that could affect your credit score negatively.