Table of contents
- What is credit score?
- How a credit report works?
- Does everyone have an access to a credit report?
- How to improve your credit score
Your credit score is the financial picture you present to lenders and creditors. Based on the information contained in your credit report, you are assigned a credit score.
With a low credit rating, you will find it difficult to get approved for a loan or credit card. A higher credit rating gives you the ability to take out a suitable loan with a lower interest rate.
Credit scores range from 300 to 850, with the top tier credit score in the range of 760 to 850. Borrowers falling within this range are considered to be low risk borrowers. 620 is the most average credit score.
How a credit report works?
A credit report contains the history of how you have paid your bills, how much credit you have, and anything else that affects your creditworthiness. Your credit score boils down all that information into a three-digit number. Using your credit score, lenders can predict with some accuracy how likely you are to repay a loan and make payments on time.
Does everyone have an access to a credit report?
Until recently, only lenders and other businesses that used credit could access it. Fair Isaac and Company, which developed credit scores, felt that the score would only confuse consumers since there was nothing to tell them what it meant or what lenders were looking for.
Since 2001, thanks to Congressional Credit Industry and Consumer groups, everyone can view and monitor their credit score online. You can order one free credit report once a year at www.annualcreditreport.com or call 1-877-322-8228. For more information about getting your credit report you can also visit www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm or contact the Federal Trade Commission Consumer Affairs Department for a fee from credit reporting agencies and credit monitoring services.
How to improve your credit score
Your credit score is of utmost importance when it comes to your credit worthiness. The first and foremost thing that a creditor will look at is your credit score before they grant your credit application. If for any reason, your credit score has decreased, then here is what you can do to improve it:
- Pay off your credit cards: The quickest way to improve your credit rating is to pay off your credit cards as soon as possible. Creditors usually prefer to see a huge gap between your credit limit and the amount of credit you currently use. The balances on each card should not exceed 30% of the credit limit. Most debt specialists are of the opinion that it is better to pay off high rate cards first. But if your financial condition does not allow that, then a better strategy is to pay off the cards you can afford first.
- Don't max out your cards: Accumulating huge balances on your credit cards can be quite harmful for your credit score, even if you pay your bills in full every month. Credit card balances directly affect your credit score. Your latest credit card statements are reported to the credit bureaus and added to your credit score. You can increase your credit ratings by restricting your balances to 30% (or less) of the card's limit.
- Monitor your limits: You should monitor your credit limit regularly. If your credit card issuer is showing a lower limit than you actually have, then the gap between your limit and the credit used will lower, harming your credit score. You should request that your card issuer updates the correct credit limit if you find an inaccurate limit on your statement. But if the issuer does not report your credit limit to the bureaus, then the credit bureau will automatically consider your highest balance as your credit limit, causing your credit rating to be at risk. An easy way to overcome this problem is to pay off your balance before the due date. It will increase the gap between credit limit and your closing balance, thereby increasing your credit score.
- Don't keep old cards inactive: If you stop using an old credit card account, the issuer may stop updating the listing with the credit bureaus. But those accounts will remain on your credit report anyway. But they will not increase your credit score like your active accounts will. Therefore, it is advisable that you use your oldest accounts at least once every few months, but don't accrue large balances on them. Keep your balances low and pay them off in full when before the statement period ends so your credit scores receives some benefit from them.
- Use your goodwill: If you have been a good customer, then you can make a request in writing to your creditor to remove one or two late payments from your credit history simply out of goodwill. If your account is still open, the creditor might agree to delete your previous delinquencies, provided you make a series of timely payments. This will improve your overall credit rating.
- Avoid applying for new credits: While you are undergoing the credit score repair process, you should avoid applying for new credit. New credit will open up new possibilities for new defaults and you may end up injuring your credit score even more.
- Seek professional help: It is very important to manage your debts properly if you want your credit rating to improve. If you are having trouble managing your debts on your own, then you can seek professional help. Sign up with a reputable credit counseling service and get enrolled in a program like debt settlement, debt consolidation, etc to pay off your debts.
Improving your credit score is not that difficult if you know what exactly you need to do. A bit of financial wisdom and a hint of frugal living will work wonders for you and help you to a peaceful debt-free future. But keep in mind that your score was not spoiled overnight so do not expect your credit score to get fixed overnight. Have patience and make your payments regularly so your credit score can improve over time.