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Credit score is a crucial factor not only in securing a mortgage, credit card, or loan – it can dramatically affect everything from auto insurance rates and cell phone contracts to overall employability.
What is a credit score?
Simply put, this is a three-digit number that any lender looks at to estimate the risk you are likely to be as a borrower: the higher it is, the better off you will be in terms of acceptability and interest rate. Lenders typically use the FICO credit scoring model – its scores ranging from 350 to 850 – and incorporate five factors when calculating it: payment history (30% importance), total amount of debt owed (25 %), length of credit card history (25%%), credit mix (10%) and new credits (10%).
If potential lenders see that you have been financially irresponsible in the past, you could be in deep trouble. (After all, would you lend your money to someone with a history of non-payment of their debts?) And you’re unlikely to be hiding anything from them, as they’ll likely consult the Big Three rating agencies. credit: Experian, TransUnion and Equifax. The credit mix, on the other hand, is an assessment of the different types of accounts in your name (including credit cards, student loans, and personal loans), while the new credit number shows how many times you have recently applied for a loan.
Once your financial history and habits are carefully dissected, you get a credit report – a summary of payment history, credit accounts, and balances. Logically, a negative payment history can damage your score. Plus, if you’re more than 30 days late paying a balance, you’ll likely be reported to one of the major credit agencies. Once this appears on a report, you are marked as an at-risk borrower, who can stay on a report for up to seven years.
Related: Why is my personal credit score used to qualify for a business loan?
Building a credit score can seem like a daunting process, and in truth, it takes time and effort, but there are specific steps to take.
1. Build your credit report
This is a vital first step in building a good balance sheet and includes opening new accounts which will be reported to offices. Credit loans or secured cards are great options if you are just starting out. One way to achieve a higher score is to mix different types of accounts. While it might seem odd to own debt in various forms, it is proof of reliability as long as you pay your bills on time, which brings us to …
2. Maintain good payment habits
One of the most critical factors is payment history. It’s simple: a long history of regular payments is the most important factor in calculating the score, so be sure to keep track of loans, credit card balances, and payment dates. And don’t wait longer than 29 days after the “payment due” date, as 30-day late payments could be reported to the offices. It makes sense to set up automatic payments, while securing associated bank accounts against overdrafts. And if you’re having trouble raising money for a bill, contact your card issuer to discuss the options. It is far worse to simply ignore the problem.
If you are having trouble with credit card debt, the wisest thing to do is to consult with a credit counselor to create a debt management plan, one of the aspects of which will be negotiating lower payments and / or interest rate.
3. Review reports periodically
Get a copy of your current report (the FTC maintains a good site detailing how and where to get them): see where you are at and where you want to go from there. One point that is often overlooked is that there can be mistakes that affect a score; if you notice any, let the credit agency know, which usually means explaining in writing what is wrong and including supporting documents. For this reason, keep track of payments (banking apps are a blessing in this regard).
Related: Help Save Your Credit Score With Lexington Law Credit Repair Service
4. Don’t use more than 30% of your credit
Be aware of your card limit and try not to use more than 30%. Excessive use of credit can hurt a score, and it’s always possible to ask a bank to increase a limit to provide more flexibility. Pro tip: To keep your balances low, pay credit card bills twice a month.
5. Minimize new credit requests
“Hard” credit applications for things like credit cards, loans, or lines of credit will most often reduce a score (a difference of a few points can make or break a request).
6. Do not close unused accounts
Don’t close that college credit card. It doesn’t hurt to keep it open; in fact, closing the account could damage your score. For each account you decide to close, points will be forfeited.
What if you don’t have credit?
If you haven’t used a credit card or loan in the past ten years, you might not exist in the world of credit reporting at all. However, not having a profile can be a big problem once you decide to put a roof over your head or a steering wheel in front of you. To prevent this from happening, check with your bank or credit union to see if you can get a secure credit card (which usually means putting down a deposit). But, of course, then you need to use it responsibly and make regular payments.
Related: How you can sabotage your ability to get financing
How long does it take to build a score
Unfortunately, there is no definitive timeline for building or rebuilding credit. The first thing to do is find out what is hurting you (or feed you), and then set some priorities. Suppose you missed a single payment. Relax: it shouldn’t take long to rebuild itself by tracking payments after a slippage. However, if you start to miss them on various accounts and waste a lot of time, it will take longer to recover.
Once you start taking steps to create it, it might take a while for you to notice an impact on a report. Still, it is important to persevere. And the truth is, no one solution is right for all situations, so it’s wise to seek credit management help when in doubt.