For something that can have such a big impact on our lives, it’s odd how little is understood by the average person about their credit score. Given that your credit score impacts your ability to secure loans, credit cards, home loans, and even rental agreements, it’s worth taking the time to understand how it works and what kind of steps you can take to improve it. After all, by earning a decent score, you could unlock better financial opportunities and lower borrowing costs.
In this article, we will delve into the intricacies of credit scores and provide actionable tips to help you enhance your creditworthiness.
What Is A Credit Score?
A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. It is calculated based on information in your credit report, which includes factors like payment history, how much credit you’ve used, the length of credit history, credit mix, and new credit inquiries.
The higher your score, the healthier your credit is and the more likely you’ll be approved for a credit application.
How Your Score Affects You
A lower score sits around the 490 (and less) mark, and generally speaking, this low score is allocated to those who are considered a high-risk. These individuals don’t typically qualify for loans. Then you get those with a score of 580-669. This is thought to be a ‘fair score,’ and these people usually get access to loans at good interest rates.
A good score, on the other hand, is anything over 700. This is the category for low-risk borrowers who, as a result, get extremely easy access to loans and lower fees than anyone else.
Factors That Influence Your Credit Score
We touched on a few factors that are used to calculate your score, but if you don’t have a firm grasp on what these factors mean to you, it can be difficult to make any real changes to your score.
Here’s a review of the factors affecting your credit score:
- Payment History: Timely payments on credit accounts are crucial for maintaining a good credit score. Late payments and accounts in collections can have a significant negative impact.
- Credit Utilisation: This factor measures how much of your available credit you are using. Keeping your credit utilisation below 30% is recommended to maintain a good score.
- Length of Credit History: The age of your credit accounts, including the oldest account and the average age of all accounts, influences your credit score by providing more history on which to base the score.
- Credit Mix: Lenders prefer to see a mix of different types of credit, such as credit cards, installment loans, and home loans.
- New Credit Inquiries: Each time you apply for credit, a hard inquiry is recorded on your report. Too many inquiries in a short period can lower your score.
Tips To Improve Your Credit Score
Seeing as how your credit score can so significantly impact your financial wellbeing, like whether a future home loan will be approved or not, it makes sense to have an idea of you can improve your score and keep it in a higher range.
Check Your Credit Report: You can easily obtain free copies of your credit reports from major credit bureaus. There are two reasons to do so, one of which is to understand where you’re currently sitting. The second is to review the report for errors, which you can then dispute to ensure your report reflects accurate information.
Click here to find out your credit score and basic credit information with our free credit report.
- Pay Your Bills On Time: Consistently paying bills on time is the most effective way to boost your credit score. Set up reminders or automatic payments to avoid missing due dates.
- Reduce Credit Card Balances: High credit card balances relative to your credit limit can negatively impact your score. Aim to keep your credit utilisation below 30% by paying down balances.
- Avoid Opening Too Many New Accounts: Frequent credit applications can lower your score due to hard inquiries. Apply for new credit only when necessary to minimise the impact on your score.
- Keep Old Accounts Open: Upon reading the above tip, you may be motivated to shutdown all your accounts, but that’s not necessarily the best idea. The fact is that the length of your credit history matters, so it’s advisable to keep your oldest credit accounts open as they contribute positively to your score.
- Diversify Your Credit Mix: The gold star that you’re aiming for is, NO unnecessary accounts PLUS one or two older accounts (for the history) PLUS a mix of credit types. For instance, a retail account and a car loan that you’re repaying. This mix is key to demonstrating your ability to handle different financial responsibilities.
- Be Patient: Improving your credit score takes time. Practice good credit habits consistently, and over time, your score should gradually rise.
Feeling Informed?
Understanding credit scores and implementing these strategies can help you to enhance your creditworthiness, access better financial opportunities, and secure credit at favourable terms.
The secret isn’t any single one of these tips. The secret to improving your credit score is simply taking proactive steps. This is what will pave the way for a healthier financial future.