Are you finding it hard to access loans and credit facilities because of a low credit score? Financial lenders look at your credit score when assessing whether you qualify for a loan, and how much you qualify for. Credit scoring has been around for a long time, especially in the US and Europe with lenders increasingly relying on it as more personal financial data become available. Your credit scores will determine if you qualify for a new credit card, how much mortgage you can access, a car loan and other important financial facilities that you need. If you are wondering how to improve your credit score it is important to understand how it works.
How does credit scoring works?
The need to assess the creditworthiness of loan applicants led financial institutions to come up with a system to try and assess different applicants. The earliest and commonly applied credit scoring system is the Fair Isaacs Corporation (FICO) scoring.
Credit reporting agencies are also known as credit bureaus do this scoring depending on the personal financial information they pull from sources such as banks, courts, utility companies, and other public information.
FICO scoring assigns a creditworthiness label depending on how much you score from 300-850. The scoring is done as follows;
|Credit Score||Rating||% of People||Impact|
|300-579||Very Poor||17%||Applications will be rejected for any financial facility.|
|580-669||Fair||20.2%||Applications are reluctantly accepted but the applicant has to pay very high interest rates and down payment.|
|670-739||Good||21.5%||Applications are widely accepted, but interest rates remain high.|
|740-799||Very Good||18.2%||Applications are quickly accepted at competitive rates.|
|800-850||Exceptional||19.9%||Exceptional Lenders are willing to offer favorable interest rates and other incentives to do business with you.|
Read More: – Find a Way to Erase Bad Credit Scores
The three major credit bureaus in the US: Equifax, Experian, and TransUnion rely on this type of scoring when issuing credit reports. They cooperate on a platform they call Vantage Score. The latest scoring method is VantageScore 3.0 that follows the scoring guidelines outlined above.
What factors affect your credit score?
- Payment history, including late payments and defaults.
- Total debts owed
- Bankruptcy records
- Type, age and number of credit accounts
- Inquiries on credit reports
- Recent credit accounts opened
The VantageScore weighs each of these factors differently;
- Most important: Payment history
- Very important: Credit usage
- Somewhat important: Length of credit history
- Somewhat important: Credit mix and types
- Less important: Recent credit
Improving credit scores
If your credit score is below 739 or GOOD rating, it is important to start considering tactics to improve the scores. Financial experts advise on the following;
1. Tracking your credit rating
The first thing to do is to how to check your credit score. You can do this by requesting your once per year free credit report from the credit bureaus. There are a few things you should be attentive about your credit report;
Erroneous entries, for example, loan repayments that are marked late even when you have cleared the loan
Fraudulent entries, for example, credit card usage that you cannot remember and verify. Financial identity theft should be reported at once.
If there is anything amiss with your credit report, you should raise a dispute with the credit bureaus immediately. If they are unresponsive, you can have your lawyer threaten legal action.
2. Keep tabs on credit card balances and clear them
Credit utilization looks at your revolving credit and how you use it. You should aim to stay at 30% or lower of your available credit on all cards. Your credit utilization ratio could still show up as high if your credit card issuer is reporting the balance on your statement to the bureau at the end of the month even when you have fully cleared it. You can arrange to pay several times a month.
Try to clear the small nuisance balances on cards that you rarely use. It is better to use one card to make smaller payments than using several cards. The numbers of credit cards on which you have balances weigh on your credit scores, so reducing the number of cards also helps.
3. Pay bills on time
It is easy to lose track of the small bills when you are saving for a major purchase. However, late payments even on small bills are negatively on your credit score. Paying bills on time regularly (weekly or monthly) reflects shows reliability.
Self-reporting is a tactic that can add to the positive scoring. This includes bills that are not normally tracked by credit bureaus, for example, internet billing or your library subscriptions. The providers of these services do not usually report to credit bureaus, but an unpaid bill will eventually show up on your credit report when they contact a collection agency to recover.
4. Shop for different types of credit in a short span of time
The frequencies of loan inquiries affect your credit scores because it means that you are looking to use more credit. Applications for credit will show up on your credit report for up to a year. Rejected applications further weigh down your credit scores.
But changes in scoring have made allowances to shop for multiple credits even when you need only one type of loan, without negative scoring if these applications are made in a short span of time. FICO scoring will ignore applications that are done 30 days before the scoring.
Diversifying your credit mix scores positively. A mixture of student loans, car loans, and mortgage which you are paying as required shows you are able to settle your bills.
Apply for one or two 0% interest credit cards and transfer them to your credit if you qualify. Qualifying for a zero interest card is very good for your credit scores because these cards are only given to applicants who are deemed creditworthy.
5. Consolidate your debt
Debt consolidation enables you to track your balances better and gives you room to restructure your total debt for easier repayment terms. Making on-time payments improves your test scores quickly.
It is important to make a plan on how to improve your credit score if you are trying to take on a big financial undertaking. A high credit score enables you to take on a bigger car loan, mortgage or even small business loan, making your life significantly easier.
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