Introduction
Credit scores have become very relevant in our financial lives, as they
determine if people will be granted loans, the interest rates they will be
charged among other things. However, borrowers, especially those in the
below-average class, may not embrace full knowledge on credit scores, causes of
credit scores or how to build better credit scores. This post offers a simple
guide to understanding credit scores and important information every borrower
needs to learn.
1. What is a Credit Score?
A credit score is a figure summarizing a borrower’s credit record and it ranges
from 300 and 850 in most cases. This is applied by the lenders in order to
determine the loan risk of an individual. A higher score gives a lower risk and
a means to get better loan deals and lower rates of interest.
2. Why Credit Scores Matter
Credit scores are the key factors that decide many aspects of your financial
life including:
Loan Approval:
Credit scores are frequently used as a basis on which lenders will either
grant or reject a loan application.
Interest Rates:
Higher credit scores also mean lower incidence of borrowing costs, such as
interest rates, need to be paid.
Job and Housing Opportunities: Sometimes, landlords and employers use credit scores
in evaluation during the rental or hiring evaluation process.
3. Factors That Influence Your
Credit Score
Several elements define credit scores:
Payment History (35%):
Payment history has a ripple effect on your score; if you make your
payments on time, your score goes up, and if you fail to make your
payments as and when required, your score goes down.
Credit Utilization (30%): This involves the amount of credit that is utilized
as a portion of total credit allowed by different credit cards. Therefore,
the optimal level of utilization ratio is below 30%.
Length of Credit History (15%): Length of credit history is also an important fact;
longer credit histories can be beneficial to score.
Credit Mix (10%):
It is also incorrect to believe that, having more than one credit card or
credit and/or a loan of some kind is bad for credit score.
New Credit Inquiries (10%): Another aspect is that too many applications for credit
negatively affect the numbers, as each application is documented.
4. Common Credit Score Myths
But there are some misconceptions about credit scores nowadays:
Myth:
By running a credit report on yourself your credit score is reduced.
Reality:
Checks that contain your name and address but no credit account or other
data are known as “soft inquiries” and it does not impact on your score.
Myth:
The other action that can increase it is cutting off credit cards that are
no longer in use.
Reality:
Some closing cards might decrease your available credit line which in
turn may harm your credit utilization rate and consequently your score.
5. Tips to Improve Your Credit Score
Building good credit score is a slow process and takes ages. Some of the
notable strategies will now be discussed:
Pay Bills on Time:
This way, always ensure you have set for reminders or automatic payments
to disallow you to overlook the dates.
Keep Credit Utilization Low: Don’t be chasing for more than 30 percent credit
limit.
Limit New Credit Applications: Do not take credit checks that you do not need because
each of them is likely going to help lower the score slightly.
Consider Credit Building Tools: With the secured credit cards or credit-builder loans
you, it is helpful to rebuild the credit score or build up over a period.
6. Monitoring and Protecting Your
Credit Score
It therefore remains mandatory that you keep abreast on your credit score if
you are to keep it good:
Credit Monitoring Services: These services can notify the consumer when there are
changes to the score, inquiries made and discourages on fraud.
Annual Credit Report:
Under current legal policies, every person is allowed to request one free
credit report from each of the three agencies. Another reason is that when
studying such reports you are able to identify mistakes that can lead to
changes of the score.
Conclusion
Educating yourself on how credit scores are calculated means you are in control
of how healthy your finances are. If you go through life paying your bills on
time, carrying little balances and keeping an eye on your credit, you can build
up good credit and start pursuing even better opportunities financially.
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