What are Credit Scores and Why do they matter?
Financial advisors and consumer advocates always tell us about how we need to review our credit score. The credit score is a highly accurate prediction of how likely you’ll be able to pay off your bills. It’s a number generated by a mathematical algorithm or formula. It considers your credit report and then compares it to those of other consumers before finally generating the number.
A credit score is of utmost importance to any individual if they want to access a mortgage, car loan, auto insurance, or credit card. This is because the rate that you will receive will directly come from your credit score. A higher credit score gives you more chances of getting such debt instruments, as your worthiness as a creditor increases in the eyes of the lender.
Factors Which Cause a Difference
People are always keen to know how they can bring a change in this score. What helps in improving this number and how it can be done?
There are a number of ways – here are some factors which do make a difference.
Did you recently take any credit?
When there is a calculation, the score will consider all the new credits you have taken. It means it also considers all inquires which lenders make, whenever you are applying for credit. If there are several inquiries and people are trying to find out more about your account, you can risk your credit score.
Do you have a diverse portfolio?
Generally, the kind of portfolio you have does make a difference. This means you have to check how diverse your portfolio is. Is there a student loan? Are there mortgages, credit card payments due, or you have a student loan? The good news is that if you are already managing a big credit amount, you will get a higher score, and it is a good indication. Thus, having a diverse portfolio is a boon and will help.
How is Credit History Important here?
This is an important factor because scorers will consider the time period over which you have held a credit account. So, they will consider your loans and their tenure. They will also consider the duration of your first credit account and your last one. To sum it, if you are managing your credits for a long time without any issues, it is good news for you.
The CU Ratio Makes a Difference
The CU ratio or the Credit Utilization ratio provides a glimpse of how much you are relying on your different noncash funds. This is calculated after considering the credit available which you are using. Scorers use a special formula to calculate this amount. In case any individual is using an amount of more than 30% of the credit available, it is not good news. It is not going to help the credit score.
Now, this number is quite crucial for several reasons.
This number provides a snapshot of how you handle credit. Lenders can use this to predict how likely you’ll pay back the loan on time. If you have a higher credit score, it means lenders predict that you’re less of a risk to lend to. Your higher credit score will make it easier for you to be eligible for a loan, resulting in a better interest rate. However, the cutoff to determine eligibility differs from one lender to another.
What is the next step? Is there any way to improve this figure?
Paying Bills on Time
Just pay your bills on time. You can do this by setting up automatic payments from your bank account. This ensures that your payments are made on time. Make sure, however, to check whether you have enough money to avoid an overdraft in your account.
Seek professional help or use tools
If you’re very much confused about the whole ordeal and you are afraid of making costly mistakes, you can always hire a professional who can guide you through the whole process. Alternatively, you can use free score simulator tools found on the web. These tools will help you to realize how your credit score responds to actions such as taking new loans or paying down existing debt.
Concentrate on Paying Credit Card Debts
This is something many overlook. Instead of paying off other forms of debt first, you should concentrate on your total credit card debt. Wiping off just a few thousands of debt from your credit card bill can have a more positive effect on your credit score compared to paying off other forms of debt such as mortgages.
You should remember that credit reports and scores are not always accurate or perfect. This is why you need to constantly check your credit reports as the chances of finding errors are not uncommon. Checking reports or your credit score annually or 3 to 6 months before you plan a substantial investment is a good practice.
How worthy are you as an individual?
Your credit score reflects this! Remember, your financial decisions are based on such a score and it can affect you in major financial decisions. Now, in case you have a bad score, you can set it right with disciplined repayments. If you feel things are unpredictable for you and repayments are not regular, it affects your credit score badly.