How to Improve Your Credit Score
Having a good credit rating is very important. It can help you obtain a home loan, a car loan, a credit card and other types of credit. Credit scores determine the types of credit you qualify for and at what rate. To help you improve your score you will need to understand how credit works and how to change the way you use credit.
How are credit scores derived? Credit scores are based on information about your credit report. The Fair Isaac Corporation (FICO) developed the credit rating system and the formula for calculating credit scores. Your credit score is a number that ranks from around 300 to about 850. This number is used to measure the risk of certain types of credit to the lender. For example, having a score higher than 700 means that the lender believes you will repay the loan without any problems. A score between 650-700 shows that you can be trusted with a loan or that you are generally a reliable customer. If your score is lower than 620, you will have to pay higher interest rates on loans. This is because the lenders will doubt your ability to repay the loan. Although the exact formula for calculating the credit score is not known, FICO once said that factors relating to how much debt you currently have and how much debt you have previously had will account for about 30% of the score. The remaining 70% is based on your payment history, the level of your current debt, credit type you have and the length of your credit history.
First of all, let us take a look at the formula for a credit score. Your credit score will be affected by the following:
The percentage of your score that is determined by the amount you currently owe on your outstanding debt is about 30% of your total score. This means that if you have several debts and a credit card with a relatively low balance, it will lower your score. This can especially harm your score if you have a large amount of debt.
A score between 620 and 650 shows that you can still obtain credit but on a higher rate than planned. While a score between 650 and 620 is considered a good score, you will have to pay higher than market rates. Isn’t it better to pay your bills? If your score is between 620 and 680 it means you have a medium to high score. Mortgage rates are usually higher for people with medium to high credit scores. Banks view you as a low risk to them. Having a high score here means that you have better terms on your loans. With an average score, you can get a mortgage loan at an interest rate of 5% per annum.
A score of 700 or more congratulations you! You have a good score. Your score is higher than that of your credit card issuer. However your credit history will determine your credit score. The longer your credit history, the better. You can obtain credit but at a higher rate. You will also be required to have a down payment. Having good credit here means that you can obtain credit at lower interest rates.
How can you increase your credit score? By paying your bills on time. If you have some slack on your payments, pay it. If you have a relatively new debt, take it off. Do you have a lot of credit types? If so, review and select the best ones. Then cancel the rest.
Try to have credit for a few types of credit like credit cards and installment loans. Do not cancel your old accounts. You may have an older account with a low balance that could help your credit score. If you have maxed out accounts try and pay them off. Lastly, remember to pay your self. There are many ways that you can improve your score. From time to time, monitor your credit score online.