If you've ever tried to purchase a car on finance, or take out a loan, you've probably heard of a credit score, the rating that gives lenders an idea of how reliable you are. But what exactly is a credit score, and what can you do to improve yours?
In this guide we'll explore the credit score, from what it is and how it works, to the different tactics you can use to build up your credit score and boost your borrowing power.
Your credit score is a three digit number that affects how easy it is for you to access credit from banks, credit card companies, and other financial institutions.
Credit scores (also known as your FICO score) are assigned to you by credit bureaus or credit reporting agencies. The numbers range between 300 and 850 and represent the risk that a lender is taking if they giving you credit.
If you have a good credit score lenders will be more confident you will meet repayments on a car loan, credit card balance, or personal loan. If you have a low credit score, on the other hand, accessing these kinds of credit products will be more difficult.
Make sure you have at least three different types of credit accounts (credit cards, mortgages, car loans) and keep all existing ones open even if you do not use them anymore.
Maintaining a diverse credit mix shows lenders that you can responsibly manage financial commitments over time and across different types of debt, and that will eventually be reflected in your credit score.
Just as your credit score will be damaged if you miss repayments on your credit agreements, you’ll also be rewarded for building up a positive payment history.
The key to achieving this is organization. Keep track of and stay on top of your bills, never let anything slip beyond 30 days, and when you do miss payments, act quickly.
In order to limit any damage to your credit score, it’s important to keep in touch with your creditors and make sure you deal with any missed payments as quickly as possible.
Most lenders apply late fees and charges to people for paying bills late, but you may be able to avoid them if you contact your creditors quickly. Even if you are charged a late fee for a missed payment, the quicker you are to contact your creditors, the more likely you are to avoid the worst of the damage to your credit score.
The best thing to do is contact creditors directly and explain your financial situation, if possible negotiate a payment plan or lower interest rates if possible (do not ever lie to creditors).
This shows lenders that you are able to responsibly manage your debts (and even increase your credit score) by catching up instead of letting them go further into collection for too long.
You can’t know whether certain actions are damaging, or improving, your credit score unless you check your credit score regularly.
Always check your credit report at least once a year. You can do so free of charge through the major credit bureaus, including Equifax and TransUnion. It’s important to remember, however, that checking your rating too often can damage you credit score.
Credit inquiries are also made by creditors when you apply for credit, so this can affect your score as well.
Your credit score is made up of many factors, but the three most important are your credit utilization rate, your credit mix, and the length of your credit agreements.
This is the percentage of total available credit that you use at one time or another. If, for example, you have $10,000 available on your credit card but only carry a balance of $2,500, your credit utilization rate will be 25%, because you’re only using a quarter of the credit available to you.
In general, the lower your credit utilization rate, the more responsible you will appear in the eyes of lenders.
Low credit utilization is vital to keeping a high score because it shows lenders that you can responsibly manage money and aren’t prone to borrowing more than your can afford to repay.
Credit mix represents the various types of credit accounts that you carry with different lenders, whether it’s credit cards, an auto loan, or a mortgage on your home.
While certain forms of credit are viewed more favorably than others, lenders and credit bureaus generally want to see someone with a diverse credit mix.
That shows lenders that you know how to juggle different types of credit accounts while keeping yourself in the green.
When it comes to your credit rating, how much credit you borrow isn’t the only thing that matters. The age of your credit agreements is important too.
The way lenders see it, someone who has only recently opened their first credit account remains unproven as a borrower.
If you have been paying off a credit card for a decade, on the other hand, you can demonstrate that you’ve been a responsible borrower over an extended period of time.
Your credit score is a number that gives lenders an indication of your credit health, while your credit report is a document that paints a picture of your overall financial health.
Your credit report might be better described as your credit history, as it provides a detailed history of all of your financial transactions. These include things like bill payments, late payments, and past due accounts.
While your credit report and your credit score are different entities, they’re also linked. The information on your credit report will be considered by the credit bureau when putting together your credit score, so if you’re having credit problems it will result in a bad credit score.
Credit scores can be tricky to manage, especially if you find yourself in a precarious financial position. But the truth is, rebuilding your credit rating is key to your future financial freedom.
If you’re looking for ways to improve your credit profile, or you’re worried about your ability to repay the debt you owe, A. Fisher & Associates is here to support you.
For free advice and guidance tailored to your financial situation, you can talk to one of our debt experts today. Give us a call for free on 416-842-0040