How to improve credit score? Here is the answer. These days, Credit Scores have gained wide popularity as a tool for assessing the creditworthiness of an individual, i.e., whether he is capable of repaying back the credit taken and that too on time. Your credit scores are not only used while applying for loans (such as auto loan, home loan, car loan, education loan or business loan) but also by insurance companies for deciding the premium amount to be charged.
What is a credit score?
Credit score is generally a 3-digit Number (ranging from 300 to 850) that is assigned to an individual based on his credit report. Hence, it is important not to use the terms ‘Credit Score’ and ‘Credit Report’ interchangeably as these two are entirely different concepts.
Previous credit performance, current level of indebtedness, time period for which credit has been in use, pursuit of new credit are a few major factors that play a vital role in calculating your credit scores. With the emergence of credit scores, an organization can readily get to know about the loan repaying capacity of an individual and hence no time is wasted in going through lengthy reports in detail.
How a credit score scale normally works?
Let us now understand how a credit score scale normally works. For example:
What is a bad credit score?
If you have a credit score lying between 300-579, then it is considered as ‘Very Poor’.
What is the average credit score?
A score between 580-669 is deemed to be ‘Fair’.
What is considered a good credit score?
If the credit score is in the range 670-739, then it is provided the rating of ‘Good’.
What is considered an excellent credit score?
A score lying between 740-799 is considered ‘Excellent’.
what is the highest credit score?
If an individual’s credit score is between 800-850, then it is considered ‘Exceptional’. In other words, an organization or individual with such a score is least likely to default.
What is a Credit bureau?
A credit bureau is a company/organization that conducts a research on credit history of individuals. They then sell this information to creditors for a fee so that they can make decisions regarding granting of loans.
The chief credit bureaus of United States are TransUnion, Equifax and Experian. These bureaus are known for developing ‘VantageScore’, which is a type of credit score like FICO discussed above. FICO stands for Fair Isaac Corporation, that developed a software for calculation of credit scores. Although VantageScore is still not as popular as FICO score, the latest VantageScore 3.0 model has started gaining popularity.
What is the credit score range?
Under a VantageScore 3.0 model, a credit score ranging between 300-499 is considered ‘Very Poor’. If your score lies between 500-600, it is ‘Poor’. Any score between 601-660 is provided with the rating of a ‘Fair’ score. Between 661-780, you have a ‘Good’ credit score whereas if the credit score belongs in the range 781-850, it is considered to be an excellent score.
“Procrastination is like a credit card: it’s a lot of fun until you get the bill.” – Christopher Parker
How to improve credit score?
Read these below points to know how to improve credit score. Following mentioned points are the 10 best ways to improve your credit score:
1. Fix the credit report errors
First and foremost, it is very important to view your credit report properly and patiently. Look for any false or outdated information that may have crept in.
If you find any, you need to immediately contact the credit bureau and get it fixed as soon as possible. Removal of all possible errors will help improve your credit score.
2. Pay your bills on time
Timely payment of water bills/electricity bills/down payments/EMI’s is a positive step in the direction of giving a boost to your credit score.
It is advisable to set reminders in case you easily forget to make timely payments. This will surely help you improve your credit score within a span of few months.
3. Beware of opening new accounts
If you are planning of opening up several new accounts within a short period of time, it can have a negative impact on your credit score. So think twice before doing so.
4. Reduce your Credit Utilization Rate
In case you own multiple credit cards and the amount that you owe on one or more than one credit card is closer to the credit limit, make sure you pay that off first quickly before it impacts your credit score.
5. Don’t close old accounts
Your Credit history contributes significantly to a healthy credit score. If you keep your old accounts open, then it will be favorable for your credit reports.
It also reduces your credit utilization ratio.
Click Here: Best way to save money for future
6. Use Credit Monitoring
Credit Monitoring helps you keep a track of any major changes in your credit reports (for example regarding any new account that you open). It also assists you in identifying any theft or fraudulent activity suspected.
You can avail free credit monitoring services on any of the websites like Credit Karma, Credit Sesame, WalletHub or Credit.com. They even provide you with monthly updates on your credit scores.
7. Soft inquiries vs Hard inquiries
Checking your own credit or giving an entity the authority to check your credit and stuff like that constitutes a soft inquiry. They do not impact your credit score at all. On the other hand, if you applying for a new credit card, an education loan, business loan or an auto loan, it is bound to affect your credit score negatively. This is known as hard inquiry.
This is because requesting for additional credit puts you at a higher risk of defaulting on your current debt. Therefore, you must limit your requests for new credit.
8. Talk to your Creditor
If you are facing troubles in repaying your previous debts, contact your creditor and chalk out a plan for making things work out.
They may agree to be flexible and this can save you from a blot on your credit score.
Click Here: Financial Tips of the Day
9. Opt for a longer tenure
Whenever you take a loan, it will be better if you choose the one that spreads over longer duration.
This ensures that your monthly installment payments are low and you are therefore less likely to default. This will definitely help in improving your credit score.
10. Avoid falling into a debt trap
It is always advisable to opt for another loan only after repaying the previous one. Taking multiple loans at a single point of time altogether affects your credit score very badly.
Timely repayment of loans will give a boost to your credit score and make you eligible for further credit as well.
I hope my readers find this article helpful. Thank you.
Author: Manasvi Nagpal