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What is a Credit Score?

What is a Credit Score?

A credit score is a numeric summary of your credit history, a commonly used method for lenders to predict the likelihood that you will repay any loans they make to you.

Credit scores range from 300 (poor) to 900 (excellent). Higher scores illustrate consistently good credit histories, including on-time payments, within means borrowings and long credit history. Lower scores indicate borrowers may be risky investments because of late payments or overextended use of credit.

There are no exact cutoffs for good scores or bad scores, but there are guidelines for each. Most lenders view scores above 700 as ideal and scores below 600 as problematic.

Consumers are becoming more aware of how raising their credit score improves their financial outlook. When people are aware of their credit score, consumer can work on problematic area and get it repair.

Major Components in The Equation That Produces Your Credit Score

1. Payment history: Do you pay on time? Do you pay the full balance, the minimum or somewhere in between?

2. Amounts owed: How much of the credit you’re allowed, do you use? If you exceed the limit, you are seen as high risk and penalized. If you use less of your credit allowed, you’re considered a safe borrower and get a positive rating.

3. Length of credit history: The longer you have an account, the better the score-keepers like it.

4. Credit mix: Credit bureau agencies likes to see a mix between credit cards, mortgages and auto loans as long as you can afford them! Don’t take out another loan in hopes it will improve your score. This category doesn’t count enough in the overall equation.

5. New credit: It’s alright to occasionally open a new account, but if you are applying for several accounts in a short period, you are a risk and your score will reflect that.

As you go through life, your credit score will fluctuate. How much it fluctuates depends on how reliable you are at repaying debt on time, especially credit cards and instalment loans. When you use credit more often, whether it’s by taking on more credit cards, getting a mortgage, taking out a student loan or auto loan, your credit score changes to reflect how you deal with the responsibility of more debt.

How to Improve Credit Score?

Look Up Your History - Negative information can lead to applications for credit being declined – check for any errors and have them corrected, find out if you are behind on accounts you may have forgotten about and get them into a payment plan or paid.

Stay on time with your payments - Sounds obvious? Well, it is. Few things can tarnish a shiny credit score as quickly as a late credit card payment. As such, it is important that you make sure to pay at least your minimum payments on time every month. Missing payments on loans or credit cards could cause problems that can cost you for years. Defaults in the previous twelve months will hurt you the most. The easy solution is to pay everything by direct debit, then you'll never miss or be late. While we normally caution against only making minimum repayments on debts (as the faster you repay, the less the total interest) one technique is to set up a direct debit to just repay the minimum, purely as a vehicle to ensure you're never late. Then manually pay more each month on top of it. If you are in difficulties, the cliché "contact your lender" is a good one. Hopefully it will try to help. Changing your repayment schedule is preferable to you than defaulting – and though it will hit your credit score, it's better than a court judgment or decree against you.

Minimize Credit applications - There are two types of inquiry on your Credit report, Soft inquiry & hard inquiry. Soft inquiry - Whenever you look up your own history online with a free tool, that is typically a “soft” inquiry that does not harm your credit, On contrast, Hard credit inquiries (meaning, requests for your credit report from lenders when you are looking for a new loan or applying for a credit card), can negatively impact your credit score in the short term. Every application you make leaves a footprint on your credit file. Too many and it might make it seem you are desperate for credit leading to companies declining your application due to the perceived increased risk.

Manage Your Credit Utilization - One of the best ways to get a handle on your credit is by working to minimize utilization of it as much as possible. Ideally, you want to aim for 30% credit use or less. Sometimes, emergencies come up that required people to use more than this. While those instances may happen, try to keep utilization under 30% during non-emergency uses.

You can control your credit utilization by:

  • Paying down revolving credit debt, focusing first on cards or lines that are close to their limit.
  • Requesting an increase in your credit line if you are a good customer with a solid payment history.
  • Paying more than once in a billing cycle; adding in a payment mid-month may lower the balance that is reported to the agencies.

Don't withdraw cash on credit cards - This is both expensive to do, as interest is higher and you're charged it even if you repay in full each month. Crucially, many lenders see it as evidence of poor money management.

Evaluate your Credit Report - Errors in the credit report have been widely reported, proving that it is a common occurrence. This is why it is important to keep a check on any possible errors in the report. Check your credit report regularly for inconsistencies. The health report will help you trace any incorrect information, delays in updating the changes and more. If you spot any errors, get them reported and rectified instantly.

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