What Is A Credit Score?

A credit score is a three-digit number on the FICO scale, which shows your ability to repay loans. It varies from 300 to 850 and is used as a reference by lenders while determining if they will give you a loan or not.

A good credit score is any score above 720 on the FICO scale, while a bad rating is anything below that figure. The limit can, however, slightly differ depending on the type of loan you are asking for, or the kind of lender you are dealing with.

If your score is not where you would like it to be, don’t worry. We will highlight the critical things of improving it, and also inform you why it’s vital to maintain an excellent credit rating.

What Factors Do Affect Your Credit Score?

  • Payment history

    This is the main factor. This information will positively impact your credit score if you always pay your loans in time. The information can also affect your score negatively if you make late payments.

  • Credit utilization rate

    This is the total available credits you have (according to credit card limits) compared to the actual credit you have. A lower credit utilization ratio denotes that you can manage credit well.

  • Many accounts

    The credit scoring models consider the number of accounts you have with balances. It's better to have many zero balance accounts rather than many carrying balances.

  • Hard inquiries

    A hard inquiry happens when your lender checks your credit report before giving out a loan. Too many hard inquiries can eventually hurt your score.

Which Are The Factors That Will Not Affect Your Credit Score?

Not all information affects your credit score. Below there are the things that you should not worry about as they won’t make a difference in your score.

  • Your job and the amount of income you generate
  • Your bank balances
  • Prepaid cards and debit cards – even when they have a credit card logo
  • The credit score of your spouse, even a bad one, can’t affect your personal credit file
  • Late fees – your late payments are not reflected in your report unless they are 30 days past the due time.

Tips to Improve a Credit Score

You can easily boost your credit rating, although it doesn’t happen overnight. This is because your account might take many years to show your present actions.

General Tips for Improving Your Credit Score

  • Don’t open many accounts rapidly
  • Avoid opening credit cards that you don’t need
  • React promptly to any missed a payment
  • Don’t close the credit cards which you don’t use
  • Dispute all inaccuracies in your credit report.

You can increase your rating in these ways:

  • Set up payment reminders
    Try to avoid late payments by using payment reminders. You can also consider subscribing to the automatic credit cards payments.
  • Reduce your debts
    Although this is easier to say than to do, reducing the number of debts you have will have a positive impact on your credit score.
  • Visit a credit counselor
    If nothing seems to work even after trying all the methods, visit a credit counselor. The impact may not be immediate, but you will get more tips on how to improve your score.

Advantages of Having a Good Credit Score

  • Low-interest rates on loan and credit cards

    Interest rates depend directly on your credit score. If your credit score is right, you will always qualify for the best interest rates for all loans.

  • Better chances of loan approval

    You might be quickly turned down by your lender during loan application if you have a shaky credit history. Although having a good credit history doesn't mean that you will be automatically given the loan, your chances of approval will be higher if the rating is excellent.

  • More negotiation power

    Do you know that as a borrower, you can negotiate on the loan’s interest rate with your lender? The bargaining power becomes even higher when your credit score is good.

  • Qualify for higher limits

    The borrower's capacity depends on their level of income as well as their credit score. Banks will give you bigger loans amounts even if your income is not high, provided that your credit score is favorable.

Message to Take Home About How to Improve Your Credit Score

You can stay with bad credit for a long time, but the option is not cheap and comes with its own challenges. Having a good credit score helps you to save money and even make your life easier. Below are the benefits of having an excellent credit score.

Considering the benefits of credit scores to your overall financial status, it’s important to try everything that will maintain your score. Come up with a proper plan and follow it until you get what you want.