In simple terms your credit score determines whether you can be approved for different types of lending such as a mortgage, auto loan, credit card, or unsecured personal loans. There are three major credit bureaus who report these scores Equifax, Transunion, and Experian.
What is a credit score?
Your credit-worthiness can be assessed through your consumer credit score, which ranges from 300 to 850. The higher the score, the more appealing a borrower seems to potential lenders.
A credit score is based on multiple factors including a person’s credit history, number of open accounts, total amount of debt, history of repayment, and other factors. Credit scores are used by lenders to determine the probability that a borrower would make timely and full payments back on the money they borrow.
How Credit Scores Work?
A credit score can have a huge impact on your financial life. It is an important factor in a lender’s decision to extend credit to you. Those with credit ratings below 640, are considered subprime borrowers. Lending companies frequently charge higher interest rates to subprime borrowers as a way to compensate for the added risk.
What factors influence a credit score?
A variety of factors are used to determine your credit score. Here, Landmark Legal will explain how your credit score gets affected and the important factors that are taken into consideration.
- Repayment History – Your repayment history reflects how consistent you have been in repaying borrowed money on schedule. If you’ve been punctual in repaying your loan or credit card obligations, your credit score is likely to be in the acceptable range.
- Credit Utilization – This shows how much credit you use out of your available credit limit. Your credit score rises as you use less credit. It is desirable to keep credit utilization below 30%.
- Credit Mix – A credit mix that includes at least one secured loan with a long term (e.g., a home loan) and an unsecured loan (e.g., a personal loan) will improve your credit score.
- Credit Age – This is the time span between when you first borrowed credit and now. The older your credit history, the higher your credit score.
Why do you need a good credit score?
A credit score of 700 or more is generally considered good and may result in a borrower having a reduced interest rate, resulting in less money paid in interest over the life of the loan. Scores of 800 or higher are considered outstanding. While each creditor has its own credit score ranges, the average FICO (Fair Isaac Corporation) Score range is commonly employed.
- Exceptional: 800-850
- Excellent: 740-799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
A person’s credit score may also influence the size of the initial deposit required to receive a smartphone, cable service, utilities, or to rent an apartment. Furthermore, lenders routinely examine consumers’ credit ratings, particularly when choosing whether to adjust an interest rate or credit limit on a credit card.
Low credit score – Low creditworthiness – Fewer chances of getting a loan in the future
How to Improve Credit Score?
- Pay your bills on time: It takes six months of on-time payments to see a meaningful difference in your credit score.
- Raise your credit line: If you have credit card accounts, contact the company and ask for a credit line increase. If your account is in good standing, your credit limit should be increased. Nonetheless you should keep your credit utilization under 30%.
- Do not close a credit card account: If you are not using a particular credit card, it is advisable to discontinue use rather than closing the account. Closing an account can harm your credit score depending on the age and credit limit of the card. Assume you have $1,000 in debt and a $5,000 credit limit divided evenly between two cards. Your credit utilization rate is at 20%, which is satisfactory. But, canceling one of the cards would increase your credit utilization percentage to 40%, which would be detrimental to your credit score.
- Use best credit repair services: If you don’t have the time to work on improving your credit, credit repair organizations will negotiate on your behalf with your creditors and the three credit bureaus in exchange for a monthly fee. Also, considering the number of options that a good credit score affords, it may be important to use one of the top credit monitoring services to keep your information safe.
In addition, if you have a low credit score (less than 700), you can utilize the following suggestions:
- Check your credit score on a frequent basis. Visit different credit score websites to examine the same and other basic information on your credit report.
- For EMI payments, use the autopay option.
- Divide the EMI or repayment amount into 2-3 pieces and spread the payment out over the month.
- Avoid presenting multiple credit card applications.
- Always keep your credit usage ratio under 30%.
- Use an unsecured loan only when you absolutely need it.
To learn more about improving your credit score visit Landmark Legal or call 855-250-SAVE