Last updated on March 15th, 2022 at 09:15 am
If you are concerned about your credit score, there are plenty of ways you can build credit. A higher credit score means that lenders are more likely to lend you money and with better conditions.
What is a credit score?
A credit score is a number that expresses a person’s creditworthiness based on a number of factors, primarily their credit report. Their spending and borrowing habits are analyzed and assessed to give a final score using a scoring model. The number will be between 300 and 800, with higher scores indicating a stronger financial history and a more reliable borrower profile.
Scores will look at your financial history to see if you have paid back debts in the past and whether you paid them back on time. It will also look at any outstanding debt, current lines of credit, and many other factors.
In the US, the average credit score is around 698. Generally speaking, scores from 670 to 739 are considered good, 740 to 700 are very good and 800 and more are considered to be excellent. Between 580 to 669 is fair but anything below that may be deemed as a poor credit score.
How is a credit score calculated?
Credit score models will typically look out for late payments, outstanding debts and whether any payments have been missed recently as all of these factors will indicate that you might be an unreliable borrower. However, there are many more factors considered when determining a credit score.
These scores are provided by the three major credit bureaus – TransUnion, Experian, Equifax; however, there may be some variation between these scores. Lenders and creditors are responsible for reporting information to these bureaus but it is possible that they only report to some or, in some cases, none of them. The three bureaus will also use different scoring models and methods of calculating the score which is why there may be slight differences.
Generally speaking, there are factors that are almost always used to calculate credit scores (although these factors may carry different weights depending on the calculation being used). These are:- Payment history – How much credit you have used vs. available credit- How many accounts you have- What type of accounts you have- Length of credit history- New applications for credit – Any debt sent to collection, foreclosures or bankruptcies
Why is a credit score important?
Your credit score acts as an expression of your creditworthiness and is used by lenders to decide the outcome of your loan or credit application. Lenders will use this information whenever you apply for a mortgage, credit card, loan or sometimes even a mobile phone contract. Although lenders will look at other factors too, such as your income, a strong credit score will always enhance your application.
How can I improve my credit score?
There are a few different ways to start building your credit score, including the following:
Manage your credit utilization rate
Your credit utilization rate, also known as a debt-to-loan ratio, shows lenders how much credit you have used versus how much is still available. It is expressed as a percentage and indicates to lenders how responsibly you are using your credit.
For example, if you have a credit card with a limit of $2000 per month, but only use $200, you would have a utilization rate of 10%. Some financial experts suggest that you should not exceed 30%.
Managing your credit utilization rate in this way could help you improve your credit score and improve your borrowing power in the future.
Cancel any unused credit cards
If you have multiple lines of credit coupled with an average salary, lenders may view your credit report as risky as it suggests that you do not spend within your means.
Unused credit cards could create unnecessary noise on your credit report. Additionally, if you have many active credit cards it shows lenders that you seek a lot of credit. It also makes you a risk as you have access to multiple lines of credit and could spend a big amount of money at any given moment.
Any cards that you do not need should be paid off or closed as soon as possible. This could make a significant and immediate improvement in your credit score.
Join the electoral register
Being on the electoral register means that there is an official record of your name and personal information. This will help lenders verify your identity when coming to approve your credit or loan application and, subsequently, could improve your credit score. This is a free and easy step that should be taken before applying for any loans or credit.
Avoid multiple loan applications
It can be easy to apply for multiple forms of credit and loans at one time to try and maximize your options – however, this could be to your detriment. Applying for multiple forms of credit in a short amount of time shows lenders that you are in constant need of cash. As such, lenders become reluctant to lend you their money.
Any loan or credit application will be recorded by a credit reference bureau and, as such, will alter your credit score.
However, some lenders will only ever carry out a soft credit check when you apply with them, meaning that your credit score will be untouched.
Dispute any errors on your credit report
Mistakes are easily made but could have a big impact on your credit score. Credit reports may show closed accounts as open, payments that were paid on time could be marked as late, or someone else’s credit activity might have been mixed up with yours. If you identify any errors, you can dispute them right away. Although the follow up takes some time (credit bureaus have 30 days to look into the errors and respond), once solved, it could quickly help to improve your credit.
