A healthy credit score is crucial for your financial fitness as it determines your credit worthiness, and is usually the first thing referred by lending institutions.
Having an inadequate credit score can be compared to the health issues that creep up due to inappropriate habits. Similarly, improving it can be linked to the healthy habits you need to inculcate if you want to boost your fitness.
Needless to say, both are equally time-consuming and require considerable efforts. However, many have no idea on how to check their score, and as such start thinking that they have no control over it. But, people with low credit score shouldn’t feel dejected as improving it isn’t impossible and can be achieved gradually. Let’s have some clarity about the term ‘Credit Score’ and its importance.
What is a Credit Score?
There are various scoring models which are used in the market such as FICO Score, TransRisk Score, CreditXpert, Equifax Credit Score, etc. However, the most popular of these measurements is the FICO score, a proprietary tool developed by Fair Isaac Corporation, as a majority of lending companies use it to determine the amount of risk involved in your loan application.
Though a FICO score of 300 is considered the least, individual with a score lesser than 650, are usually considered to fall on the lower side of creditability spectrum, and may have to shell out high rates of interest on their credit cards or mortgage loans, if they qualify for it in the first place. On the other hand, anything above 740 is considered excellent, prompting the banks and lending institutions to offer the best rates to the people with such a score.
How is it calculated?
Being proprietary in essence, the exact formula for calculating these scores is not disclosed by its developers. However, the criteria along with their proportions are revealed – 35% to the payment history while the amount payable carries a weight of 30%. The time-span of credit history accounts for 15%, while fresh credit 10% and the rest 10% is allocated to the type of credit used.
These scores have an industry-wide usage as not just lenders but even insurance firms, as well as rental home owners, are increasingly using them to find out the creditworthiness of their customers. Here are few tips that can help you to improve your ratings.
1. Credit Report Analysis
To increase your credit score, you first have to identify it, for which you need to analyze your credit report. It’s available for free online. Equifax, Experian, and TransUnion are the three bureaus that maintain it and provide an updated copy each year. It’s important to compare the three and check for discrepancies to make sure they accurately report your credits and payable bills.
2. Variance Reporting
If you spot a bill that you have paid in full but still listed as outstanding on your credit report, it’s important to check with the creditor and inform the inaccuracy. Sometimes, you could even find an application for a new credit card, which you never made. Such a thing can signify a potential identity theft or fraud and must be brought to the creditor’s notice to refute any fraudulent activity.
3. Avoiding Frequent Applications
There are chances that you are lured by a new credit card offer appears quite attractive, and you keep applying for it even if there’s little chance for you to get. It. You must note that repeated requests for credit can have a negative impact on your credit score. It’s one of the reasons that you need to check your report and remain vigilant of credit card request that hasn’t been made by you.
4. Establishing Credit-worthiness
Though it’s easier said than done, paying the bill on time is one of the vital steps to build your credit. The FICO Scores can keep increasing with timely payments as the ramifications of past credit issues on your FICO Scores start diapering as your recent pattern of prompt payments begins to take precedence. To ensure this, you need to go for a loan or use your credit card only if you know that you can afford to pay it back in full.
5. Avoiding Revolving Credit
Paying down your revolving credits in the form of loans or credit cards debts is one of the effective ways to boost your score. Resisting the compulsion to open many new accounts in a short time and having fewer open accounts with the same outstanding amount can affect your score. It’s because new loan accounts will lower your average debt age as quick loans appear risky for a new credit user from a lender’s perspective.