A credit score is a visual representation of how much you are creditworthy to different lenders. It is a graphical illustration that anyone can understand at first sight. And, the credit score will be the ultimate measurement of how your repayment ability and how they can transfer credits to you.
Numerous ways of representation may be there in the credit score. But, all of those represent one unique way of analysis. Often this is a numerical expression of your credit ability. But, as we mentioned earlier, nowadays, it uses as a visual representation with an adapted credit score scale.
Since it is easy to refer to and easy to understand, anyone can keep updating the current credit score values to prevent it from reaching the lowest rate. A lower credit score will not give you any benefits other than being stuck in you to face emergencies without any help.
The importance of credit scores:
Once you keep a high-level of credit score, you may enjoy the following key benefits.
01. You can go for higher credit limits
Usually, lenders are very much enthusiastic to assess your repayment ability before passing a credit limit. The only measure used to analyse this capacity is the credit score. Once you maintain a good credit score, you may be able to be qualified for a higher credit limit. This will be an immense power in emergencies.
02. Your negotiation and purchasing power is higher than others
When your credit score is high, you can request negotiation to meet your purchasing ability. So, maintaining a higher credit score will let you become a competition-free purchaser.
03. Ability to get the lowest interest rates possible
If your credit score is maintained at the higher end, you can definitely avail lowest interest rates.
Overview of the steps to building a strong credit score:
Here are the five basic steps that you need to follow in maintaining a good credit score. The core of these recommendations is the understanding of the concept, keeping reviewing the latest updated credit score, avoiding unnecessary lowering of the score and promoting the number of credits applied in a given period.
Understand How Credit Scores Work
First of all, you should have a good understanding of how credit scores work and what are the criteria for assessing them. Usually, a credit score can range from 350-850. Maintaining more than 760 is considered a higher credit score value.
The credit score will rise with every repayment you made and will lower with all the rentals and lending you made. Thus, having two, three or many lendings per time will be caused to quickly lower your credit score.
So, let’s see what are the major factors that contribute to the rise or reduce credit scores through the following brief of writing.
The factors that go into credit scores
According to recent practices, five factors can decide your credit score.
01. Payment history
A cleared payment history means you have paid all the payments that are supposed to pay within the period on time. This becomes a remarkable marker of credit score as new lenders are considering this factor a lot when deciding whether to apply your credit application or not.
02. Length of the credit account
The length of previous credits and how far you have to make the payments are other factors that decide how much your credit score is. If this length is minimum, you have more chances to go for a new credit account as your credit score is high.
03. Loan amount on your account
How much capital you have paid so far is another factor that decides your credit score. It does not mean how many instalments you have made.
04. New credit amount that you are hoping to apply
Next, the most important factor is the number of credits you are going to apply through a new credit account.
05. What are the other type of credit you are using
Other credits mean credit cards, easy payment plans and any other digitalised repayments that you are supposed to pay. This is also a considerable factor in managing a good credit score.
The impact of credit scores on financial opportunities
As we highlighted earlier, having a credit score of more than 760 is considered an excellent score which enables the ability to execute a new credit account.
If this score is more than 700 it is also a good marker. If it is less than 700 but more than 600, it is a moderate risk of having accessibility to a new account. Unfortunately, if it is less than 600, it further lowers your chances.
It means all the possibilities of availing of a new credit file are based on your credit score.
Check your Credit Report
You may not familiar, but there are ways of checking your credit report. This helps you to review it as often as you need and maintain it at an optimal level.
How to access and review your credit report
Reviewing a credit report should be followed by a legal process through an authorised agency. It is not available as your bank statements and loan repayment statements Etc.
However, this possibility is changing from country to country. Thus, the best thing is seeking what is a trusted way of receiving the credit report. Sometimes, some countries are releasing this report annually. But, some countries issue it only upon a subscription fee.
Thus, it is based on where you are living. Anyway, make sure that there are chances.
Tips for correcting any errors or inaccuracies
The credit reporting company or authority is responsible to correct errors and inaccuracies that are possible in your credit report. But, a formal letter or information sheet may require from you to accept this request. Thus, you should update with the exact procedure before applying to avoid unacceptably.
Anyways, again, the procedure of correcting any errors or inaccuracies are varying from country policies. Thus, have simple research over the internet to know the expected way of appealing to your credit reporting authority.
Pay your Bills on Time
Paying your bills on time is an important part of personal financial responsibility. This includes not only utilities and taxes, but any other sort of recurring payments such as subscription services or loan payments.
Paying bills on time shows that you are dependable, responsible and able to manage your finances in a timely manner.
The impact of payment history on credit scores
The payment history contributes to 35% of your credit score. Thus, it resembles almost one-third of the credit scale. So, having a weak payment history can be a great impact on credit score.
Strategies for staying current on bills and payments
Here are the best tips to maintain a good payment history:
01. Keep updating with your due dates. This is essential as passing the due dates just due to negligence can increase interest rates several folds.
02. Have a bill space in your home. Maintaining moderate space to arrange bills will be a good indicator of you are aware of your bills.
03. Maintain a list of bills that are supposed to pay within the given period. It gives you a brief overview of how much credit worth is.
04. Have a separate date to pay bills. The best date for this purpose is your salary day. Once you divide your income with your budget on the date that receives money will help you better manage credits.
05. Check your statements regularly. Nowadays, most people are willing to get their e-statements other than paper-based ones. So, regular email checkups on the expected dates will let you make bill payments on time.
Keep balances low on credit cards and other “Revolving Credit”
The majority of people lose their credit score just due to poor management of credit cards. As it seems these are the friend of the day, people mostly go for quick payments with credit cards.
So, eventually, they end up with unnecessary credit balances even with high interest.
The impact of credit utilization on credit scores
The credit utilization ratio is the measure that makes an impact on your credit score through credit card usage. On average, this should be maintained at a level of 30%. It means you have more than 70% of the credits to use from your credit cards.
But, if you exceed this value, it resembles that your credit utilization ratio is more and your credit score is less. Thus, you are at the lower end to request a new credit account.
Tips for managing credit card balances and other revolving credit
Find these three tips for better managing your credit card balance:
01. Stay updated with available credit card balance to decide what will be your next payment.
02. Review your effective dates regularly to avoid missing due dates which can cause higher interest rates.
03. Arrange easy payment loans for zero interest as much as possible and try to complete the repayment period within a minimum level.
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Don’t Apply for too Much New Credit at Once
Applying for too much new credit at one time can harm your credit score. This is because when a lender reviews your application, they will check your credit reports and scoring to see how many other lenders you have applied to recently.
If you’ve opened multiple new lines of credit in a short amount of time, it may suggest you’re reliant on credit and lenders may be less likely to approve you. Therefore, it’s important to space out your applications and not apply for too much new credit all at once.
The impact of new credit on credit scores
A new credit means you are going to lend a number of credits other than available. Since the payment period and capital that is due are maximum at the new credit account opening, it reduces credit score faster than the current value.
So, once you open a few credit scores at the same time, there is a high risk of lowering the credit score up to the lowest end. The major problem here is the time takes to reverse it.
Usually, your credit score will remain on this risky end, until you compete for a few ongoing credit account repayments. Thus, there are no more chances of getting credit help even in emergencies.
Tips for managing new credit applications
Here are the five tips you should look for to manage a good credit score with managed new credit accounts.
01. Have a list of credit accounts you are hoping to open in the near future.
02. Analyse what is the most advantageous one for you by considering interest, repayment period and additional fees.
03. Discuss with the lending authorities.
04. Try to make easy payment plans that is matches to you.
05. Have a set of objectives that you are going to do with the credited amount after opening a credit score.
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The Bottom Line
A life free of credit is definitely a life without a burden. But, since we are living in a competitive era, sometimes, we have to go for credit account opening. And, there are numerous kinds of bills and taxes on behalf of your name. All these collectively affect your credit score. This is the score which decides how much creditworthy you are.
Maintaining this at a desired level is an ideal factor to be financially independent without unnecessary burdens. Thus, we hope, by following these 5 steps, you can build a strong credit score and improve your financial opportunities.
