Credit Score Fundamentals – What Newbies Need To Understand About Credit Scores
Credit cards are all the rage in this tech-driven world. With all kinds of products and services on the market, it is not surprising that consumers prefer to spend money that they do not have to get their hands on various products, subscriptions, and so on. Credit cards are a blessing if you know how to use them. However, poor credit card management can lead you into a world of trouble. If you are new to credit cards and credit scores, this article is for you.
What is a Credit Score?
A credit score is a measure or representation of the likelihood that you will repay the loans that your lenders give you. Your credit history determines your credit score, which ranges from 300 to 850. The higher your score, the less of a risk you come across to your lenders. If you have a good credit score, you can expect to receive appealing credit card deals and great interest rates and repayment periods.
How is your Credit Score calculated?
Now that you know what a credit score is, these are its components and how it is calculated:
- Payment history: This parameter accounts for 35%. Check if you have missed payments or defaulted on loans.
- Current debt: 30%. Check how much money you owe and if you have maxed out your credit cards.
- Length of credit: 15%. Are you new to credit or have you proven your ability to borrow credit and repay it?
- New credit: 10%. Ask yourself if you have applied for multiple loans in the recent past.
- Types of credit: 10%. Check if you have a healthy mix of various types of debt, including, auto, home, credit cards, and others.
What are the benefits of a good credit score?
If you are going to get a credit card and build your credit score, you need to know what you can get out of it. Here are some essential benefits of having an excellent credit score:
Increased chance of Credit Card and Loan Approval
One of the key benefits of an excellent credit score is your increased chances of availing credit cards and loans. Most borrowers with a mediocre credit history generally refrain from applying for a new credit card or loan because of having been turned down previously. While a solid credit score does not guarantee that you will not have to face rejection, it certainly reduces the chances of that happening.
Lenders generally consider a wide range of factors, including income and debt. However, you can still apply for most credit cards and loans with an excellent credit score.
Low-Interest Rates on Credit Cards and Loans
Here’s another key benefit of an excellent credit score. If you have an excellent credit score, you will qualify for some of the best interest rates, and as a result, you will end up paying much lower interest charges or fees on any credit card balances you may have. The less interest you have to pay, the more money you have for other expenses.
Increased chances of getting approved for Higher Limits
The amount you are allowed to borrow depends on your credit score and income. If this is not an incentive to learn how to improve your credit score, nothing is. Having an excellent credit score helps you show the lender that you can repay the money you borrow. You could get approved for some loans with an average credit score. However, your limits may not be optimal.
Easier to negotiate
Maintaining a solid credit score allows you to negotiate a lower interest rate on your credit card or loan more effectively. You can show the other options that are available to you to bargain and negotiate. However, if you have a low credit score, your chances of convincing your lenders are slim. In other words, you will have fewer options, which will drastically affect your ability to negotiate.
How do you improve your credit scores?
At this point, you probably understand why it is essential to maintain a good credit score. However, if you are reading this, chances are you do not have a solid credit score just yet. Here are a few things you can do to improve your credit score:
Check your credit card reports
Yes, this sounds obvious. However, many consumers fail to check their credit card reports regularly, leading them to overlook possible errors and inaccuracies. These errors can significantly affect your credit score if you do not rectify them.
There may be unintentional errors in the interest, fees, or the balance you owe your lender. If you end up having to pay extra when you probably should not have to, you can expect your credit score to take a beating.
Take care of your late payments
Ideally, you should take care of your credit card bill payment, as early as possible. However, you may have to delay your payments once in a while. If this is the case, you need to do what you can to take care of those payments as soon as possible because late payments will affect your credit score. Also, you cannot get away with closing the account.
If you are known to make your payments on time, you can ask your creditors to forgive one or two late payments. However, this will not work in most cases. If you have a negative mark on your credit report, you may have to call your lenders and convince them that you are not a risk. One of the most effective ways to rectify a slew of late payments is to make many more on-time payments.
Boost your credit limits
Ideally, your credit utilization rate should be around 30%. However, this may be difficult for you. If that is the case, you can get your credit limit increased. If you happen to have a decent payment history and have managed to up your credit since you opened your account, you can expect your creditors to increase your credit limits. Doing so will help your credit utilization ratio and raise your overall credit score. Additionally, you get more purchasing power.
Figure out what you need to improve
Once you study your credit card reports, you need to identify the areas of improvement. You may have to look at parameters like payment history, the debt amount, and the age of your account.
If your payment history contains a list of overdue payments, you will come across to your lenders as a liability, which means you can expect your credit score to get affected. As mentioned earlier, this parameter accounts for 35% of your credit score.
Additionally, your debt amount accounts for 30% and the age of your account makes up for 15% of your score. Lenders prefer to see a record of borrowing money and on-time repayments.
If you are new to credit cards, you probably know by now that you need a solid credit score to widen your credit card and loan options. This article should help you get started with handling your credit. Be sure to make payments on time and take care of outstanding payments as soon as possible.