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The Ultimate Guide to Improving Your Credit Score

Your credit score can have a considerable impact on your financial future. A good credit score can help you get easy access to loans, get a new credit card, and of course, it can help you save a lot of money.

On the other hand, if your credit score drops below a certain level, life can become pretty tricky. You may even find yourself in trouble in terms of finance.

Generally, everyone knows exactly what a credit score is. But it can be pretty difficult to comprehend how it works thoroughly. This is one of the many reasons why a lot of people fail to maintain good credit health.

Although this is a pretty complex subject, it’s also not too complicated. You may have to put some effort to learn all about the terms, procedure, and actions you need to follow to level up your scores, but it’s definitely worth the effort.

Credit Scores InDepth

A credit score is a numerical expression which is composed of a three-digit number. These numbers are the information that is used to analyze the credit report or the credit history of a borrower. It can be said that your credit health is good if the numbers are higher and vice-versa. The credit score information is collected and recorded by the Credit Bureau. 

A credit score is essential in the world of finance, as it allows the credit card companies, banks, and other lenders to determine whether a particular individual is worthy of trust. In other words, it helps the lenders to evaluate the level of risk involved in lending money to the borrowers.

By examining the credit health of the borrowers, the lenders or the credit card companies can decide whether or not to grant the loan application. It also applies to granting and denial for a new credit card.

It must be understood that the banks and the lenders are not the only institutions which use the credit score. In fact, this technique is also used by the government, digital finance companies, insurance companies, mobile phone companies, automobile companies, landlords, and many others.

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Types of Credit Scores

There is no universally accepted credit score which is applicable to anyone anywhere. There are several types of credit scores which slightly differ from one another. Also, different countries use different types of credit scores.

Similarly, there are different scoring models, different methodologies, and multiple credit bureaus. This is the reason why a single person is assigned with multiple credit scores. So if you’re dealing with more than one credit score, maintaining good credit health may sound pretty intimidating.

The good thing is, despite having to deal with numerous credit scores, you can focus on one or two that matters the most. The two types of credit scores that are most popular and widely used are the FICO Score and Vantage Score.

FICO Score

Although there is no universal credit score standard, there is one model which has been in use for a long time, and it’s also the most commonly used. FICO (Fair Isaac Corporation), which came into being in the mid-1950s, has been in service for a very long time. It’s not only popular in the United States alone, but it’s widely recognized in many countries around the world. FICO credit score ranges are 300 to 850.

Vantage Score

Another popular credit scoring model is the Vantage Score. This model is a creation of three major American credit bureaus, namely: Experian, Equifax, and TransUnion. Vantage Score is probably the only credit scoring model, which has been in competition with the FICO Score, the most popular and most widely recognized model. Vantage Score often uses the numbers 501-990, but they usually use the letters (A –F) to rate a credit score.

Things to Consider When Comparing Your Credit Score.

  • Be sure of what type of credit score you’re looking at. It could be a FICO score or a Vantage Score. 
  • Your credit report information is given to the credit bureaus by the lenders. This means they may or may not supply the information to all three bureaus. So don’t be surprised if all the bureaus do not have the same credit score information.
  • In some cases, the way the credit bureaus displays the information may vary, although each of the bureaus has the same information.
  • The credit bureaus get the credit info from the lenders at different times; some may have the most recent info, while some may have a week or month old info.

Credit Report and Credit Score

Credit bureaus collect the data or information related to the credit score of the people from the lenders. The data that is collected by the bureaus are called credit reports.

The information that you provide the financial institutions or businesses, such as banks and credit card companies, will affect the status of your credit score. As new credit reports are collected and updated, your credit score is changed.

How are Credit Scores Calculated?

Calculating the credit score is a pretty complicated process. The top-scoring agencies like FICO and Vantage Score use the consumer’s credit report to calculate the credit score. Although there is a lot of difference between FICO and Vantage Score, both of these scoring agencies calculate the credit score using the same criteria.

Here is a breakdown of the factors or criteria which are used to determine the credit score.

Payment History

This is the essential factor which scoring agencies use while calculating your credit score. A creditor can tell if you’re reliable or not by looking at your payment history. Home loans, installment loans, retail department store accounts, auto loans, mortgage, and credit cards are all included in the payment history.

In short, your payment history can tell a lender if it’s a good or a bad idea to do business with you. For instance, if you have a good credit report, it’s an indication that you’ve been making timely payments, and there is no negative record. However, it’s the other way around if your credit report has derogatory or negative remarks. This is why scoring agencies give a lot of attention to payment history when calculating the credit score.

Credit Card Usage

Another significant factor which determines your credit score is the rate of your credit card usage. A higher credit utilization ratio can have a negative impact on the credit score. If you have several credit cards that have maxed out the credit limits, creditors will assume that you are financially irresponsible.

Age of Credit History

The age or length of your credit history can also have an impact on your credit score. If you have a long history of responsibly and consistently making your payments on time, your credit score will be good. Here, the scoring agencies will take into account the following factors: age of your oldest and newest credit account; how long all of your accounts have been active; and the most recent activity on each of your credit accounts.

Generally, it’s a good idea to keep your first credit account active since the lenders want to see excellent and lengthy credit history.

Number of Active Accounts and Credit Mix

Owning a multiple credit account means that you’re frequently making deals with more lenders. These may include your credit cards in use, auto loans, mortgage, and other accounts which affect your overall credit score. In addition, using a credit mix is also a contributing factor.

Credit mix has two main categories:

  • Installment Loans: These are those types of loans which you pay within a limited timeframe. This type of loan is usually divided into first, second, and third installments, or more. For example, if the total amount is $15,000, you have to pay $5,000 in each installment.
  • Revolving Credit: Credit, on the other hand, requires you to make your payment on a monthly basis depending on the usage of your credit.

New Credit and Type of Accounts

When your credit score is being calculated, your new credit accounts are also considered. Recent or fresh accounts are sometimes put into consideration when determining the age of your credit history.

You may also want to make sure that you can responsibly manage different types of credit accounts.

Soft Inquires and Hard Inquires

Inquires are not visible to others, and they does not have an impact on your credit score. Although they are recorded on the credit report. Every time you request for a credit inquiry, it means you’re making a soft inquiry. A soft inquiry can be initiated by the lenders without your permission.

On the other hand, a hard inquiry is when creditors or lenders run a scan on your credit report when applying for a loan or a new credit account. Hard inquiries cannot be initiated without your permission. But keep in mind that they are visible to any person who has access to your credit report. Also, hard inquires may have an impact on your credit score.

It is most unlikely that your score will be affected by a hard inquiry. However, you need to be careful, as hard inquires remain visible on your credit report for years. This can be pretty bad for your credit score. Why? Let’s consider the following case.

You’ve made multiple hard inquires within a year. This means you’ve either applied for loans or credit accounts and other similar activities. When the creditors notice that you’ve made multiple recent inquires, they’ll automatically assume that you’ve already tried several places for credit and that you’re hopping around to find one.

To researchers, consumers who apply for multiple credit accounts within a short amount of time are often unreliable, and they’re financially unstable and irresponsible.

Photo by cafecredit

Having a Good Credit Score: Why It Matters

Maintaining a good credit score is what many people strive for. But not everyone is successful in doing so. You may somehow manage to survive with below-average credit, but it will be a lot harder. It’s also not going to be cheap.

With a good credit score, you can have access to numerous opportunities and make more savings, and your life will be a lot easier. If you’ve been ignorant about your scores and you want to consider a change, here are some reasons why you should give it a try.

Access to Lower Interest Rates

When the numbers on your credit score information are higher, it means you have what it takes to manage your finance responsibly. Every time you apply for a loan, your credit score will be an essential thing which will reflect your behavior in terms of finances.

If your score is excellent, you’ll have a better chance of getting the interest rate. This means you pay less, and you can clear the debt faster.

Better Chance of Being Qualified for Loans

Getting more substantially sized financing, like a car loan, business loan, or mortgage, is much easier if you have good credit. Customers with a poor credit history cannot get a loan even in the case of an emergency.

But if your credit score is good enough, you can quickly get a loan. Whenever you show up at the financial institutions with a good credit score, you will be treated with respect, and the creditors will gladly accept your loan application.

Negotiating Power

When applying for a loan, you can confidently talk to the lenders to grant you a lower interest rate if you have a good credit score to back up your arguments. You can also tell the lenders about the offers you got from other companies should you ever need a more negotiating/bargaining power.

Finding an Apartment is Easy

Nowadays, many landlords run a check on the credit scores of the apartment seekers; you can take advantage of your credit history to get the keys to your new home.

And More

In addition to the above-listed benefits, you can also enjoy many more benefits from the cell phone service, insurance companies, credit card companies, department stores, and even online lenders.

Rebuilding Your Credit Score

You’ve learned how your credit score is calculated and what affects your credit score. Now it’s time to start working for a high and excellent credit score. Follow these simple steps to keep your credit score in a good shape successfully.

Check your credit score.

Knowing the status of your score is the most important thing to consider. You can order a credit report from each three major credit bureaus.

Since you can order only one credit report from each bureau in a year, it’s best to wait four months until you order from the other agency. This way, you can compare the report at the end of the year.

Check for errors.

An error-free credit report cannot always be expected. If you see any errors, such as late payments, it’s going to affect your score. In this case, you should immediately contact the credit bureaus and resolve the issue. The credit bureaus generally provide 30 days for investigation.

Identify those habits responsible for your low score.

If you are a frequent shopper, you probably use multiple credit cards. This can harm your credit score. You should try using a debit card or cash when you’re out shopping.

If you have multiple credit cards with a high balance, it’s a good idea to freeze some of them temporarily. These are just a few examples. You should be able to pinpoint your own flaws, and be sure to discard them.

Make your payments on time.

Making a late payment is very harmful to your payment history, and your credit score. Keep in mind that payment history adds up to 35 percent of the credit score.

If you find it hard to remember them, set up a reminder – it will help you a lot. This applies to your utility bills, cell phone service, any other online services, and rent.

Reconsider your credit mix.

Diversifying your credits is a good thing too. For example, if you can manage different financings, such as personal loans, credit cards, and mortgages, it’s a way of telling the lenders that you’re a responsible person.

However, it’s best to avoid those financings which you cannot handle or which you don’t need.

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Additional Tips

If you’ve been in a bad situation and you have a bad credit history, do not panic. Almost everyone has been there at least once. Maybe you’ve managed your finances well in the past. But a small credit mistake might have cost you in the form of a negative or a derogatory mark. Follow these simple instructions to get those mistakes fixed.

Keep your debt on your priority list.

You may be dealing with numerous financial related problems – paying for your children’s education, emergency fund saving, and paying for your basic needs. However, if you can keep your debt on top of the priority list, it can help you unlock new opportunities and save a lot of money.

Avoid late payments.

To improve your credit score, make your payments as soon as you can. The longer the delay, the more damage you’re causing to your credit score.

Late payments usually remain in your credit report for seven years. So be consistent, and don’t make the same mistake.

Avoid making too many hard inquires.

Hard inquires remain visible on the credit report for almost three years. Do not apply for credit unless necessary. Do so only if you’re sure that you can make the payments on time.

Have your credit limit increased.

It’s good to have your credit limit increased. This can cause your credit utilization ratio to be lowered automatically. However, you need to limit your spending too.

It’s not wise to increase the credit limit and spend more than you usually would. Doing this can cause significant damage to your credit report.

Know your credit score.

Checking your credit score periodically is a good practice. Remember to order your credit report from each credit bureau. Again, you can order only one report from an agency in a year. This means you can have three credit reports in a year, since there are three major credit bureaus in the US.

Frequently Asked Questions about Credit Scores

I don’t have a credit score. Why is that?

To generate a credit score, the scoring agencies need a lot of credit information. You may not have a credit score if you don’t have a credit history or there is too little information.

How much score is needed to classify it as a good credit score?

Different scoring models use different methods, and the numbers differ too. You can get to know if your credit score is good or bad by ordering a credit report from the credit bureaus. It will also be extra helpful if you can get to know what type of scoring system is being used by a particular lender you’re dealing with.

By now, you must be well equipped with all the information you need to keep your credit score in good shape. It’s not so easy to maintain good credit, especially if your report has terrible remarks, but it’s not impossible. You need to be patient and determined.

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