The credit system is designed to work through a mechanism that links lenders to credit reference bureaus. Whenever you borrow money, the lender alerts credit bureaus that you’re indebted to them and gives the specific details of your loan, including the amount taken and the type of loan.
This information is kept in the bureau and is updated each time you pay or fail to pay as agreed. This information is what goes towards preparing your credit report. The report’s contents are, in turn, used to determine the credit score.
The components of a credit report are assigned different weights when calculating a credit score. Therefore, some aspects of your credit habits are not as important as others. With that in mind, you can tactfully work on specific elements of your credit habits to help you improve your score.
The time element is also an important aspect in improving one’s credit report. Certain components require a longer time to improve than others. Therefore, you should bear this in mind whenever you intend to apply for either a loan or a credit card.
Tips for improving your credit score
1. Always prioritize paying your bills in good time:
The ultimate cure for debt is repayment. Many people build up a poor credit history not because of their inability to pay but because of frequent late payments.
Many lenders take late payment as a red flag for potential default in the future.
It is understandable that you may be having many bills that are due for payment on different dates. This may pose a challenge if you have a busy schedule, and you may accrue past-due bills as a result. To make things easier, you should have reminders on your phone or mark the dates in your diary.
Note that a late payment can stay on your record for as long as seven years, making it quite costly because of the opportunities it could deny you during that period. It also benefits you to pay in good time because it is a way of avoiding penalties and high-interest accruals. Note, however, that the weight of a late payment on your score will progressively decline over time.
2. Have different types of credit accounts:
Creditors also assess your ability to service a loan based on the other types of credit you have taken. Your chances of getting new credit are greatly enhanced when you can prove that you previously took and are currently servicing different types of loans without default. This will satisfy their belief in your ability to repay new credit.
That does not mean that you should take unnecessary loans with the sole intention of raising your credit score, but it is an emphasis that you shouldn’t be afraid to take another credit card or a new mortgage as long as you can take care of all your debt obligations.
3. Develop a habit of evaluating your credit reports:
Credit reports are not foolproof. The entire chain of documentation leading up to the final credit report is long and voluminous, thereby making it susceptible to errors of omission and commission. Therefore it isn’t uncommon for credit reports to have some errors that may ultimately lead to a bad credit score.
With this in mind, you should countercheck the information presented in your credit report against your record of what you owe. Highlight all errors you have identified and raise whatever reservations you have with your creditor to ensure that errors are fixed. You can access your credit report as frequently as you deem necessary by paying the required service fees or get one for free every year on annualcreditreport.com.
4. Don’t apply for credit unless you know your credit score:
Many people do not know this, but whenever you apply for either a loan or a credit card, the inquiry is reflected in your credit report. The more the applications you make and get declined, the more it negatively impacts your credit score.
It is therefore advisable to be strategic when applying for a loan by first obtaining your credit score and understanding its implications before approaching a creditor. With your most recent credit score in hand and having established that your score is good enough for the loan you are seeking, your big job remains searching for a creditor with good interest rates.
As explained above, some components of a credit report are weightier than others. Credit application inquiries are among the lighter components. An application for credit will typically be retained in a credit report for one year. This is a shorter stay than the weightier components, but it also means that repeated inquiries will deduct significant points from your score.
5. Reduce your debt
Your debt obligations can be a burden in your effort towards getting a good credit score. Creditors will assess the amount of debt you owe against your credit limit to establish your creditworthiness. The bigger the percentage of your debt as a fraction of your credit limit, the poorer your score will be.
Credit is important for your personal development. However, it can easily become a burden if you fail to manage it appropriately. Knowing how to manage your credit is key to experiencing financial freedom and succeeding. You should employ the measures discussed above to stay out of the red credit line or get yourself out of a bad credit situation.