A credit score is a numerical value that represents the creditworthiness of an individual. Based on this score, lenders gauge the likelihood of a borrower repaying their loans on time. The scoring model used to calculate the credit score of an individual is based on information available in your credit report. This information or history of one’s payments can help a credit reference bureau to tell if an individual is creditworthy. If your credit score is low, you will find it difficult to secure credit. Even if one finds a lender, they will have to repay the loans once advanced but at a higher interest rate. You need to learn how to fix your own credit score so that you can qualify for loans at better interest rates.
What are the Factors Used to Calculate a Credit Score?
There are many factors that credit companies use to calculate your score. Here are some of these factors:
- Your history of paying bills. If you are not prompt in paying your bills, then it becomes difficult for lenders or mortgage companies to trust you. As such, always pay your bills on time.
- Do you have unpaid debts? These are also considered in calculating your score.
- How many loan accounts do you have? How prompt are you at paying such loans? Remember to close loan accounts that are not needed.
- The length your loan account has been open also matters in calculating your credit score.
- Have you had a debt sent to a collection? Have you had a foreclosure or bankruptcy? These can also be used to calculate your credit score.
- Your new credit applications are also considered in calculating your score.
If after the above factors have been considered and your credit score is low, there is still hope that you can improve it. We shall now consider some of the tips you can use to improve your credit score. Here are 3 of such tips:
1. Checking of your credit reports
Your credit report entails all your credit dealings and is used to come up with your credit score and rating. Credit bureaus have these reports with them and are available for your perusal. You can get your credit reports from the bureaus once a year. One of the best ways to improve your credit rating is by ensuring that the information contained in the credit report is accurate. Also, check that people have not stolen your identity as this can negatively affect your credit record. Is your payment information accurate? What about your personal information? What are your credit balance and limits? Ensure this information is accurate, contrary to which you should have it corrected. Always contact the credit bureau and the creditor to ensure any inaccurate details about your records are corrected. This is a sure way of improving your credit score.
2. Set Automatic Payments of Bills
Sometimes one forgets to pay their bills in time even when they have the money to do so. Most companies are happy when someone sets an automatic bill payment arrangement. Those who do pay their bills late will suffer penalties associated with such late payments. Your lender will be interested in these late payment penalties and this will affect your creditworthiness and the rate of interest charged to your loans. For credit reporting companies, late payments by a day may not be an issue. Remember that on-time payment of bills and loan installments can account for up to 35% of FICO scores.
3. Reduce Amounts you Borrow and Don’t Borrow Too Often
One must borrow reasonable amounts and ensure they do not exhaust what is known as credit utilization rate. Do not use more than 30% of your available credit utilization as this means that you are not budgeting well. Remember that the above credit utilization contributes 30% to your FICO score. However, this does not mean that one should borrow too little. Lenders also want to know how you use credit and this can only be possible if you borrow and spend. When it comes to fixed-rate loans, beware of your debt-to-income ratio. This should not be too high as it affects your future loans.
It is also advisable that one should not borrow too often. As such, people who tend to default on their previous loans are likely to borrow more often. This means that they will have their credit report pulled more often by the lenders. These new inquiries will work to your detriment as you will get what is known as hard inquiries. The more credit reports are pulled about you, the more this affects your credit scores.