Most people think that a credit score is an arbitrary number that banks and other financial institutions use to turn down applications because of an obscure, probably made up standard. But actually, a person’s credit score is a tool that can be controlled to their advantage and financial well being.
Most consumers do not know the basic facts about credit scores and the financial significance they hold. In fact, after a recent poll conducted by Opinion Research Corp., only 27 percent of consumers knew that their credit scores measure how much of a credit risk they are for banks and other financial institutions.
Your credit score, more often known as your FICO score, is a numerical representation of how likely you are to pay back a loan on time based on the information in your credit history. A higher score means you are less of a risk than those with a lower score.
Three major credit bureaus are responsible for creating your credit report based on information they receive from companies that you have transacted with in the past. These are Experian, Equifax and TransUnion, the big three of the credit world. From the report that each of these credit bureaus creates, a credit score is derived to represent your overall rating, usually ranging from 300 to a perfect score of 850.
A credit score is a quick way for lenders to assess how much of a risk you pose as a borrower. Again, the higher your score, the less risk you are and all the more likely you will be approved for loans and get the best rates available.
If you have a very low credit score, it will be very difficult for you to enjoy the financial perks available in the industry. Everything you do nowadays depends on your credit score. Getting a credit card, buying a car, even having a phone is dependent on whether your credit score is good enough.
First thing to do so that you can improve you financial standing is to actually know what your credit score is. You can request it from any of the three credit bureaus and once you get it and see what you have, you can figure out how to improve it. Here are some tips to follow to improve your rating:
- Pay your bills on time
Late payments on loans or credit card bills can have a major negative impact on your credit score. As long as you pay your bills on time, your poor credit score will gradually improve.
- Keep balances low on credit cards
If you keep your outstanding credit card debt continually high, your poor credit score will remain just that: poor. As much as possible, use cash and refrain from maxing out your cards to avoid negative points.
- Keep the number of credit cards you have low
Opening new accounts lowers your average account age, which lowers your credit score. Having new accounts all the time and getting rid of old accounts isn’t as good for your poor credit score as you might think. If you cancel a paid off credit card and decide to open a new one, both actions will still show up on your credit report and are usually factored in negatively on your score.
- Be responsible
The most important factor in getting your poor credit score up is to just be financially responsible. If you have a credit card or take out a loan, make sure to pay your obligations on time. As long as you keep abreast of your financial commitments, there should be no problems for you to improve your poor credit score.