What is a Credit Score?
A credit score represents an individual’s financial and credit standing and ability to obtain financial assistance from lenders. Lenders use the credit score to assess a prospective borrower’s qualification for a loan and the specific terms of the loan. Essentially, it is used to determine the borrower’s ability to pay back the borrowed amount. A consumer credit reporting agency provides credit score assessments, such as Equifax or TransUnion.
Who Uses Credit Scores?
Any organisation that lends money as a source of business uses credit scores to assess a borrower’s eligibility. Such organisations include banks, credit card companies, fintech-based lenders, insurance companies, landlords, government agencies, and mortgage companies.
It can be any individual or organisation that seeks to lend someone money or enter into a contract that will require another party to pay them back in a predetermined time.
How to Improve your Credit Score
- Pay your bills on time
Paying off what is due on time will establish your credibility as a borrower. Building your credit history takes time, and steadily paying off what you owe on time is considered one of the most significant indicators of your creditworthiness.
For lenders, past behavioural patterns are considered key indicators of the future. Therefore, proving to lenders that you can pay back on time helps improve your credit score.
- Reduce your overall loan amounts
Proactively paying off more than what is due will ultimately help you showcase yourself as a credible borrower who not only pays back but who does so ahead of the due date. Doing that can also decrease any interest payments on borrowed funds.
For example, if you have the means to prepay your mortgage, then by doing so, you are coming across as a credible borrower, and your credit score will improve.
- Manage credit cards effectively
Credit cards, if used diligently, are an excellent way to improve your credit score. Ideally, you should not spend more than 35% of your credit limit. Following this practice will help keep your total debt amount in check and help ensure that you can quickly pay back the financing extended to you. Lenders look at how much of your available credit you have borrowed. Again, to rate higher with lenders, it’s a good idea to access no more than 35% of your available credit at any given time. So, for example, if you have a credit card with a $5,000 line of credit, you shouldn’t allow your outstanding balance for that card to get above $1,700-$1,800.
- Do not buy what you can’t afford
As a golden rule, do not purchase things that you can’t immediately pay off. While buying things on credit is convenient, if there is something you cannot afford immediately with the funds available to you, it is generally better to look in the other direction.
Maintaining financial health is all about making the correct decisions for yourself in the broad scheme of things and not indulging in impulse purchases that you may regret later.