Your credit score is an important factor when applying for a loan such as payday loans or personal loans, opening an account and even just trying to secure a job. Should you want to improve your credit score, it is important to know how this works. Although many debts and records can have a negative on your rating, there are a few things you can do that will make a difference. If you want to build a better credit score, then keep reading this article to know what you must do to achieve the desired improvement.
What Is A Credit Score?
A credit score is a number from 300-850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. It can be used to spot financial risks that could affect the economy and expose businesses to serious problems. A credit score forecasts your possibility of repaying debt on time. A scoring model generates a credit score based on information from your credit report.
Companies construct their credit score from the information in their credit report using a mathematical process known as a scoring model.
A typical credit score is comprised of the following factors:
- Your payment history
- Your current outstanding debt
- The number and kind of your loan accounts
- How long have your loan accounts been open?
- How much of your available credit are you utilising?
- New credit applications
- Whether or whether you have had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago this occurred
Why Does A Good Credit Score Matter?
Your credit score is used by lenders to assess your creditworthiness. Your credit score influences whether or not you are authorised for credit cards, loans, mortgages, and auto loans, as well as the interest rates and terms that private lenders may assign you if you are approved. Good scores are based on the number of open accounts, total levels of debt, and repayment history. If there’s an account that has been closed or has had a late payment, that could lower your score in the long run.
In addition, when you apply for a new home, insurance companies, landlords, and employers may all check your credit score. In these circumstances, a solid credit score indicates your general dependability and accountability.
Types Of Credit
There are three main types of credit: installment credit, revolving credit, and open credit. Each of these types is borrowed and repaid with a different structure.
- Installment credit: When you take out an instalment loan, you borrow a certain amount of money and make fixed monthly payments until the debt is paid off. An installment loan can be repaid over months or years. Its interest rate might be constant or variable, which means it could rise or fall in the future. Additional expenses may apply to installment loans. The loan will have an interest rate, repayment term and fees, which will affect how much you pay per month. The common types of installment loans include mortgages, student loans, car loans and instant cash loans.
- Revolving credit: Revolving credit is the most common type of revolving credit account. Revolving accounts allow you to repeatedly borrow and repay amounts from a single line of credit up to a maximum limit. You’re in control over how much you borrow (and ultimately need to pay back). Interest is charged on any balance remaining after each statement’s due date, so it’s possible to avoid paying interest if you pay your balance in full each month. As long as you make all your payments on time, the account will remain open indefinitely until you choose to close it.
- Open credit: Open credit is a great benefit to you and your family because it offers low-monthly payments and no minimum balance. Your electricity bill is an example of an open credit account. The amount due depends on how much electricity you used that month. You can pay your entire bill in as few as 10 or 15 days after receiving it. If you miss a payment or fail to pay the entire balance in full, just call your credit card company to let them know. Most providers will work with you to come up with an alternate payment plan until you’re caught up.
6 Steps To Increase Your Credit Score
Step 1 – Stay On Top Of Your Credit Reports
You should always be monitoring and checking your credit reports. This will ensure that you’re not being affected by any negative information and that you’re in control of your credit score.
Step 2 – Pay Bills On Time
Make sure that you pay your bills on time. Not paying your bills on time will lead to an increased risk of defaulting on payments in the future. Therefore, if you want to increase your credit score, then paying your bills on time needs to be a priority for you.
Step 3 – Keep Balances Low On Credit Cards
If you want to build your credit score, make sure you keep balances low on your credit card. The best way to do this is by paying at least the minimum amount each month and making only the minimum payments on time. You should never miss a payment, but if you do, make sure it’s because there was an emergency or other unforeseen circumstance that prevented you from paying on time.
Step 4 – Pay Off Debt
Paying off your debts is important to have a good credit score. It will help you build a good credit history and stay out of debt in the future. This is because paying off all your debts will lower your interest rate, which means you can get better loans for the future.
Step 5 – Pay More Than The Required Minimum On Your Credit Card
Paying more than the minimum required on your credit cards will put you in a better position for future loans because it shows that you have good habits about paying down debt and not maxing out cards whenever possible.
Step 6 – Apply For And Open New Credit Card Accounts Only As Needed.
This is because when you have too many open accounts, it can be hard to keep track of them all, so you’re more likely to miss a payment or two. And what happens if you miss a payment? Your credit history will take a hit. So don’t try to max out your cards and create an unmanageable mess of finances. Instead, make sure you’re using each account responsibly and paying off any balances on time.
How To Get Help With Your Credit
If you feel you need extra help building or repairing your credit score, there are plenty of resources available.
First, it’s important to stay educated on how credit works and what impacts your credit scores. Credit reports are available from all three major credit bureaus (Equifax, Experian and TransUnion). These reports contain information on your payment history and ability to pay back debts over time. The better your credit report looks, the higher your score will be.
You can also look into other options for improving your credit scores such as taking advantage of a low-rate loan through a bank or credit union. It’s important to keep track of all of your accounts so that if one closes unexpectedly or goes unpaid, you can update it immediately with the appropriate information before it damages your chances of getting approved for future loans or credit cards down the road.”
There are plenty of resources available to help you raise your credit score over time. The key is to follow these tips, stick with them and be consistent when making payments or paying off debt on time. In the end, consistent positive behaviour is the best way to raise your credit score and make sure you are taking advantage of all the benefits that a higher score can offer. All it takes is some time and patience, and following the steps will certainly help you get there.
Author Bio: Marjorie Hajim is the SEO Manager for Friendly Finance. Friendly Finance is a leading loan matching service in Australia specializing in consumer finance. She loves growing businesses with a focus on their online presence and is passionate about organic growth and all things digital.
If you are interested in even more geek-related articles and information from us here at Bit Rebels, then we have a lot to choose from.