Have you been trying to apply for a financial loan (such as a mortgage) but have been told that your credit score is too low? Here’s everything you need to know about credit scores, and some easy ways you can improve yours.
Why do I have a bad credit score?
Your credit score is based on an algorithm calculated from the information on one of your three credit reports. This means you will have numerous credit scores depending on what information the lender takes. Although these scores may range, the factors which make your scores higher or lower are usually the same. For example, most scoring models consider your payment history on loans, credit cards, and how often you apply for new credit.
Here are common credit management mistakes:
- Overusing one credit card: By placing all your out-going credit on one credit card, you risk racking up your utilization percentage. This value is calculated by comparing your credit being used, or “utilized”, to your overall available credit. Having a large utilization percentage indicates you may struggle controlling your spending. Furthermore, by utilizing too much of your available credit, suggests to lenders you have more debt in relation to your income.
Increase your utilization to available credit ratio by getting another credit card or increasing your credit limit. However, if you’re worried about controlling your spending, you could make more frequent payments on your one credit card then pay off your loan sooner. - Never checking your credit reports: Everyone is entitled to at least one free credit check once a year. It is essential to check your credit health as well as any discrepancies which may unnecessarily affect your credit score negatively. Dispute incorrect information as soon as possible.
- Applying for credit too frequently: Applying for a new credit card creates a hard inquiry on your credit report and stays on your history for 2 years. Too many hard inquiries in a short time frame suggests you may be in financial trouble. This will negatively impact your credit score and can minimize your chances of being approved for other loans or new credit card applications.
Tips to improve your credit
The FICO Score’s scale of 300 to 850 rates a credit score below 669 to be fair or bad. This “subprime” rating suggests to lenders that the borrower may struggle with repaying loans. Lenders will look more positively on borrowers whose credit score is greater than 670. However, the higher the score, the greater your chances of being seen as a favorable borrower.
Start working your way to a “very good” credit score of 740 with these tips:
- Prioritize paying your bills: Repaying your bills on time is a big indicator of reliability for lenders. Paying your electricity provider, monthly credit, and subscription services on time indicates that you can responsibly manage your finances. If you struggle with remembering regular payments, set up automatic standing orders or create recurring calendar reminders.
- Limit your amount of hard inquiries: Open new credit accounts only when necessary. Applications for new credit cards or credit increases can hurt your credit score in many ways. Too many hard inquiries suggest financial trouble and having multiple credit accounts increase the likelihood of overspending.
- Pay off debt: Debt accumulates over time. Accumulating debt due to interest rates on loans will negatively impact your credit score and the minimizes likelihood of getting approved for new credit. Pay off debt with the highest interest rates to limit the negative impact on your credit history.
Conclusion
Improving you credit score takes a lot of time and dedication, but it isn’t impossible. By only taking out credit when needed, being mindful of your spending habits, and incorporating these credit management tips sooner rather than later, you’re on your way to obtaining an “exceptional” credit score.