If you have a credit card or you experienced taking out a loan, you must be familiar with a credit score and what it means. In a nutshell, a credit score is a number that is calculated using the details on your credit history or report which represents how trustworthy your reputation is as a borrower. The credit score ranges from 0-1,200 or 0-1,000 which mainly depends on the credit bureau you prefer to use. Regardless of the credit score range, it only implies one thing in general - the higher your credit score, the better your credit position currently is.
To have a clearer understanding of this matter, here are essential facts you need to know about credit scores.
Why Credit Score Is Important
A credit score is important in more ways than you can think of. Mainly because it is one indicator of risk. When we say risk, it’s about the risk that borrowers are taking whenever they approve your loan application. A higher credit score is considered better as it indicates a lower risk.
It is also important because it can provide you with a better indication of how a lender may view you when you apply for credit. It helps borrowers decide whether or not to accept your application for a loan or credit card. It’s one of the factors that can help them decide how much they will lend you, the terms and rate that they offer you. So, the higher the credit score, the better the loan amount and terms you’ll get. Thus, it’s paramount that you maintain or improve your credit score moving forward.
Building Credit Score Without Debt
A credit-builder loan is indeed one of the most effective ways to build your credit score. You just have to find a credit union or community development financial institutions that offer credit-builder loans to help you out. In this type of loan, the borrower places the money you borrow into a certificate of deposit or savings account. You can’t claim the money right away, though. You need to wait and pay for 12 monthly payments before you can claim it. This way, your credit score can improve greatly.
The other option is to apply for a secured credit card. The issuing bank will provide you with a credit line that is lesser or equal to the amount you deposit. This is not an overnight thing, though. It will take time but it is guaranteed to help build your credit when paid on time.
Improving Credit Score With Good Habits
Okay, so, this is the most important part that you need to learn about credit scores. It doesn’t mean that having a low credit score or if you already have a good one, you can’t work on improving it. Of course, there are still rooms for improvement. Why settle for good, when you can achieve better?
Here are good habits that you can do to grow your credit score.
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Pay your bills on time. It’s a crucial process that counts more than anything.
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Use your card regularly but in a light manner. Limit your purchases and try not to consume 30 per cent of the credit limit.
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Pay your balances in full. If your goal is to improve your credit score, then there’s no use in carrying your debt.
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Avoid closing accounts. Keeping your credit cards open would improve your credit score. However, you need to limit your utilisation to achieve better results.
How To Maintain Credit Score
Once you have achieved a high credit score such as 690 or above, it’s crucial that you protect it. To do so, the best thing to do is to avoid missing or skipping payments. Consider putting all your credit accounts on auto-payment to prevent such a lapse. Otherwise, you’ll suffer from a drop of 100 scores and that won’t do you any good.
In addition, be sure to check your credit report. Review all the details and file for a dispute whenever you find an error. Plus, you can check if there are any possible instances of identity theft when you request a credit report. Otherwise, it can devastate your scores.
Key Takeaway
Needless to say, having a good credit score is important in your financial health. Learning more ways to improve credit score could help you achieve better scores as you move along. Remember, it’s not an overnight process - it takes time. Most importantly, make it a habit to pay your bills on time and limit credit utilisation. Instead of begging for loans, paying high interests and trying to make do with what’s leftover, you’ll finally have some options to get ahead of your financial future.