Your credit score is the most critical factor that will determine the amount of interest you have to pay on a loan. Having bad credit can be detrimental to your finances and place many obstacles in front of you when it comes to accessing loans.
Fortunately, there are many ways to boost a credit score. Read on to learn more about improving your credit score.
What Factors Make Up Your Credit Score
Given below are the major factors that make up your credit score:
Payment History
Payment history accounts for 35% of your credit score. Serious payment issues such as bankruptcy, charge-offs, tax liens, repossession, and foreclosure can hurt your credit score, making it difficult to get approved for anything that requires good credit. The best way to improve this scoring factor is to make on-time payments every month.
Credit Utilization
Credit utilization refers to the amount of your credit limit you use. It accounts for 30% of your credit score. To maintain a good credit score, try to use not more than 30% of your credit limit. You can minimize your credit utilization by trying things such as making extra payments during the month and setting balance alerts.
Duration of Credit History
The length of time your accounts have been open, as well as the length of time since the account’s last action, account for 15% of your credit score. While it is impossible to have a good score if you are new to credit, it can take just a short time to achieve a favorable score.
A more extended credit history offers more information and a clearer picture of long-term financial discipline. Thus, if you don’t have a credit history, you should start using credit to improve your score.
Types of Credit on Your Report
This factor accounts for 10% of your credit score. There are two main types of credit accounts – installment loans and revolving accounts. You’ll generally have a better score if you have both types of credit on your credit report because it shows you have experience in managing different types of credit.
Number of Credit Inquiries
The number of hard inquiries financial institutions make when you apply for credit makes up 10% of your credit score. Too many inquiries can be an indication of higher risk, which can be detrimental to your score.
Side Effects of a Bad Credit Score
Bad credit can have a range of negative repercussions, including the following:
Your Loan Application Might Be Rejected
If you have poor credit, lenders and creditors see you as high risk. Thus, they’ll be less inclined to lend you the money you need. Whether you want a home loan or a car loan, your loan applications might face rejection.
High-Interest Rates on Loans and Credit Cards
Credit scores show the likelihood that you’ll default on a loan or credit card obligation. Having a poor credit score means you’re a riskier borrower compared to somebody with a better score. Lenders and creditors will make you pay for that risk by lending you money at a higher interest rate.
Paying a Deposit for Utilities
With poor credit, you’ll often have a hard time setting up an account with an electric supplier or other utility companies. The utility companies may ask you to pay a deposit before you sign up for a service. The deposit will serve as insurance in case you fail to pay your bill. If you do not want to pay a deposit you might want to compare energy plans and look for a light company with no deposit.
Higher Insurance Premiums
Your premium won’t go up because of a drop in your credit score. Likewise, a decrease in credit score range below 600 won’t lead to the cancellation of your policy. However, a poor credit score may undermine your chances of getting the lowest possible rates.
Tips to Improve Your Credit Score
There are many ways to improve your credit score. Below are a few simple tips to get you started:
Review Your Credit Report
Request your free credit report and review it carefully. Dispute any mistakes that you find. Alerting the credit-reporting agency on wrong information will help boost your score when they remove the false information.
Make Timely Bill Payments
Lenders check your credit report to see how timely you pay your bills. They usually consider past payment performance as a good indicator of future performance. You can improve this credit-scoring factor by making on-time bill payments.
Pay off Debts
Your outstanding debts account for 30% of your credit score. Thus, debt repayment can go a long way in improving your credit score.
Lower Your Credit Utilization
Credit utilization is the second most crucial factor in determining your credit score. You can manage your credit utilization by paying your credit card balances in full every month. Try to keep your total balance at no more than 30% of your credit limit.