What is a Credit Score, and why is it important?
A credit score is a three-digit number that lenders use to measure the creditworthiness of an individual. The credit score is an important component of your financial life that considers your credit history and how that is relevant to your worthiness for new lines of credit.
A high credit score is an indication of good credit history. With a high credit score, it is easier to get access to new loans, premium reward credit cards, and lower interest rates on credit. Whereas, with a low credit score, it is difficult (even impossible) to access those benefits.
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You can get access to your credit report and credit score from any of the three credit bureaus that publish them (Equifax, Experian, and Transunion) at annualcreditreport.com. It is free once a year.
Common causes of poor credit score
There are two types of credit scores: FICO score and the Vantage Score. The FICO score is more popular. FICO considers five factors in measuring credit score. The first is payment history, which has a 35% weight on the overall score. The second factor is credit usage with a 30% weight on the overall score. The others are age of credit accounts (15%), credit mix (10%), and new credit inquiries (10%).
Some of the common causes of bad credit score include:
- Late or missed payments
- High credit card balance
- Foreclosures
- Judgment
- Collection Accounts
- Bankruptcy, etc.
Seven ways to improve your credit score
It is possible to improve your credit score and achieve a better score over time. The process might sometimes take weeks or months, but with consistency and commitment, you can make things happen.
Here are some good ways to improve your credit score:
1. Review your credit report
It is impossible to improve your score if you don’t understand the causes of the poor score. By acquiring your credit report, you have first-hand information on the state of your finances. Such information will help you identify weak areas you need to focus your attention on.
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Similarly, go through the credit report to see if there are any errors in it. Credit bureaus are not infallible, and some errors might be fatal to your credit score. In case of errors, ensure you open a dispute with the relevant bureau.
[bctt tweet= ” Credit bureaus are not infallible, and some errors might be fatal to your credit score. In case of errors, ensure you open a dispute with the relevant bureau.”]
2. Pay your bills on time
Payment history is a key component of the credit score. One thing that weakens your score in this respect is late payments. Therefore, to improve your credit score, you need to avoid late payments of your bills. This includes not just your credit card and loan payments, but regular bills like rent and utilities.
To accomplish this, you can keep track of your bills with a spreadsheet, set alerts for the due dates of every bill, or place standing orders at the bank that automates bill payments from your account at particular dates.
[bctt tweet= ” keep track of your bills with a spreadsheet, set alerts for the due dates of every bill, or place standing orders at the bank that automates bill payments from your account at particular dates”]
When late payments occur, or you miss a payment entirely, ensure you will bring them current as early as you can.
3. Reduce the occasion for hard inquiries
A hard inquiry is an inquiry made into your credit report by credit agencies with whom you are seeking new lines of credit. When you apply for a mortgage, auto loan, or a new credit card, there is a hard inquiry by the lending agency.
Inducing many hard inquiries in a short period will worsen your credit score. Therefore, It is important to only apply for new lines of credit when you really need it. You should also ensure you are a good fit for the line of credit before making an application. Opening unnecessary credit accounts will harm rather than help your credit score.
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4. Aim for a lower credit utilization rate
The credit utilization rate is the portion of your credit limit you are currently using. If someone has a credit of $25,000 and the credit limit is $50,000, the credit utilization rate is 50%. People with good scores on Vantage tend to have a credit utilization rate of 30% or less. Similarly, those with good credit scores on FICO tend to have a credit utilization rate of 10% or less.
[bctt tweet= ” People with good scores on Vantage tend to have a credit utilization rate of 30% or less. Similarly, those with good credit scores on FICO tend to have a credit utilization rate of 10% or less. “]
Ensure you pay off your debts and lower the balances on your credit card. Going forward, make sure you pay credit card balances in full at the end of every month. Carrying credit card balances for a month to the next harms your credit score (especially with Vantage Score). Another way to achieve this is to increase your credit limit. However, increasing your credit limit will not help if you still increase your credit balances.
5. Explore Score Boosting Programs
Certain score boosting programs help you to fatten a thin credit learn to get a good credit score. They do this by including certain information on your credit report that improves your performance. For example, if you pay your utility and telecommunication bills at the right time, the Experian Boost program will help to feature those timely payments on your report. UltraFICO is another program that will help feature information from your savings and checking account in your report. If you pay rent as at when due, you can also use Rental Kharma and RentTrack to include those timely payments on your account (works for only Vantage Score)
6. Keep old accounts open
When you close old credit accounts you no longer use, it reduces your credit limit, which in turn increases your credit utilization ratio. Keep your old accounts open as long as you made timely and complete payments on them. Such accounts show a history of paying off your bills on time, and they add to the quality of your credit score.
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7. Monitor your credit
It is essential to also monitor your credit activities by subscribing to any of the numerous credit report monitoring platforms. With these programs, you can easily monitor changes in your report. Furthermore, they help you to confirm if every change on your account came from you. This is important in a world of identity fraud. Monitoring your report will help you see if you are making the progress you desire.
Conclusion
A high credit score comes with lots of advantages. Therefore, improving your credit score is an important financial goal. However, following the above-listed steps is not enough. You must cultivate good credit habits, learn to differentiate between good and bad debt, and pay more attention to your finances. How you handle your finances is an important part of your life, don’t leave it to chance.
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