Credit scores are important because they are one of the main factors that lenders look at when considering a loan. A high credit score means you're a low-risk borrower, which could lead to a lower interest rate on a loan. Conversely, a low credit score could lead to a higher interest rate and could even prevent you from being approved for a loan altogether.
Why does your credit score matter so much?
Credit scores are one of the most important factors that lenders look at when considering a loan. A high credit score shows that you're a low-risk borrower, which means you're more likely to repay your debts on time. On the other hand, a low credit score can make it difficult to get approved for a loan at all. In addition, you may be offered less favorable terms if you are approved. For example, you may have to pay a higher interest rate or put down a larger down payment. Therefore, it's important to understand what goes into your credit score and how you can improve it. The better your credit score, the easier it will be to get approved for a loan with favorable terms.
Here are three ways to boost your credit score:
1. Make your payments on time - Payment history is the most important factor in determining your credit score, so it's important to make all of your payments on time, every time.
2. Keep your balances low - Credit utilization, or the amount of debt you have relative to your credit limit, is also an important factor in determining your credit score. As such, it's important to keep your balances as low as possible.
3. Use a mix of Credit types - Another factor that lenders look at is the mix of credit types you have (e.g., revolving credit, installment loans, etc.). Having a mix of different types of credit can actually improve your score.
Conversely, here are three ways to damage your credit score:
1. Making late payments - As mentioned above, payment history is the most important factor in determining your credit score. Therefore, making late payments can have a significant negative impact on your score.
2. Maxing out your Credit cards - Credit utilization is also an important factor in determining your credit score. Therefore, maxing out your Credit cards will likely have a negative impact on your score.
3. Closing unused Credit cards - While having a mix of Credit types can improve your score, closing an unused Credit card can actually hurt your score by reducing the amount of Credit available to you relative to the amount of debt you have (i.e., increasing your Credit utilization). Therefore, it's generally not advisable to close unused Credit cards unless there's a good reason to do so (e.g., you're trying to avoid annual fees).
The bottom line
Finally, consider adding a mix of different types of credit to your credit report. Credit scoring systems like to see that you're able to manage different types of credit responsibly, so having a mix of revolving credit (like credit cards) and installment loans (like auto loans) can help improve your credit score. If you don't have much credit history, opening a secured credit card and using it responsibly can also help you build up your credit file quickly. By following these tips, you can give your credit score a quick boost and get back on track to financial success.