Understanding Credit And Improving Your Credit Score

When you apply for a job, the employer will look at your background – your degree, the university where you came from, your achievements and your skills. These are the some of the things that will qualify you for the position or the job. In our financial life, there is one abstract thing that is used to measure your credibility – our credit.

Understanding ‘Credit’

According to Investopedia, credit is the “creditworthiness or credit history of an individual or company.” Basically, it means that a person or a company with good credit standing is able enough to obtain goods or services before payment.

A credit is usually measured in a score. A credit score is a statistical figure that evaluates your creditworthiness. Banks, lenders and credit unions use the credit score to determine the probability of an individual or company to repair the debts. Credit scores are very important before you can purchase a house, get insurance for your car and even some companies use your credit score as the basis for your promotion or salary raise.

There are various credit score schemes. The most widely used by financial institutions is the FICO score or the scoring system created by Fair Isaac Corporation. The FICO score ranges from 300 to 850. On the other hand, most people understand the vantage score system with these average score ranges and their corresponding values:

  • Excellent: 750 and above
  • Good: 700 to 749
  • Fair: 650 to 699
  • Poor: 550 to 649
  • Bad: 550 and below

Basically, if you have a credit score of 730, it means you have excellent credit score. However, if you have a credit score lower than 601, you have a bad credit score.

Improving Your Credit Score

Maintaining a good credit score is very challenging. It is a crucial factor for banks and stores to approve your interest of purchases. Even your job relies on maintaining good credit. Thus, it is important that you improve your credit score.

Minimize Outstanding Balances

According to FICO, one of the best ways to improve credit score is to eliminate nuisance balances. These are balances you have on various credit cards. One factor that your credit score considers is the percentage of your cards having balances. Thus, it is important to minimize outstanding balances, especially the small ones.

Moreover, you shall also pay any outstanding balances that are not yet sent to collections. If your payment is one to two months late, it will not affect your credit score badly. The late payment will till show on your report, but the impact on your credit will gradually lessen over time. Also, pay outstanding bills that are sent to collections. It is better late than never.

Pay Bills On Time

Paying bills on time is one of the standards of your responsibility as a credit holder. So if you have purchased a brand new car using your credit, then make sure that you will pay the monthly dues along with the interest rate on time. The smartest choice is to enroll or sign up for an automatic payment. Automatic payment allows banks or lenders to debit a certain amount from your savings. This will prevent you from late payment charges and will provide you rebates for on-time payments.

Reduce Credit Utilization

Credit Utilization is another important factor in your credit score. It is the ratio of your balances to your credit limits. To calculate your credit utilization, you just have to divide your balance by your credit limit then multiply by 100. So if you have an outstanding balance of 200 and you have a credit limit of $1000, your credit utilization is 20%.

FICO scoring model examines your credit utilization. It will gather your credit utilization from each of your credit cards. Then, they will accumulate your overall credit card utilization. A high credit utilization can hurt your credit score. The purpose of the credit score is to determine your probability of repaying. However, if you have high credit utilization, there is a chance that you are more likely to default on credit obligations. Thus, it will lower your credit score.

Perform Credit Repair

Probably, you have a bad credit score because there are errors in your credit reports. It is time for you to perform a credit repair. Credit repair is performed to correct all inaccurate and incomplete information in your credit card report. To do this, you must secure free copies of your credit reports from major credit bureaus. Then, check for some errors. If you have determined errors, you have to dispute the inaccurate information to the credit bureaus. The credit bureaus will investigate and will make necessary corrections in your report.

Don’t Close Accounts or Credit Cards

Your credit age or the duration that your accounts are open has an impact on your score. Banks and lenders check if you have at least three open and current sources of credit. The longer your account is open and is in good standing the better. Also, if you close any cards or reduce your credit limit, you will reduce your borrowing power which will increase your credit utilization.

Avoid Opening New Accounts

There are three reasons why you should not open new accounts. First, a new credit card lower your average credit age. 15% of your score is based on your credit age. Thus, the more transactions you have, the better your score will be.

Second, a credit inquiry is paced in your report when you open for new accounts. Inquiries are 10% of your credit score and an additional inquiry can reduce your credit score points.

Lastly, opening a new credit card could increase your credit utilization. 30% of your credit score considers your credit utilization. The more you consume of your credit limit, the more it will hurt your credit score.

Practice Budget Management

The bottom line of everything is to practice budget management. Having an excellent credit score doesn’t mean that you have the freedom to perform unlimited purchases. You have to be responsible for your expenses. Always practice budgeting and monitor your credits, debts and other expenditures. Be smart in this world full of opportunities.