Do you know your credit score? If not, you should find out – especially if you’re thinking about taking out a personal loan. Your credit score is one of the most important factors lenders look at when deciding whether to lend you money, and what interest rate to charge you. Luckily, there are steps you can take to improve your credit score. Here, we share our top tips.
Understand what credit scores are and how they’re calculated
Credit scores are important numbers that show lenders how likely you are to repay a loan. They’re calculated using information from your credit report, and they can range from 300 to 850. A high credit score means you’re a low-risk borrower, which could lead to lower interest rates on loans. A low credit score could lead to higher interest rates and could mean you won’t be approved for a loan at all.
You have two main credit scores, and they’re both used by lenders to make lending decisions. Your FICO score is the most well-known credit score, and it’s used by 90% of lenders. It is based on:
- 35% payment history
- 30% total debt
- 15% length of credit history
- 10% types of accounts you hold
- 10% new credit
Your VantageScore is another popular credit score, and is a collaboration between Equifax, Experian and TransUnion. This uses the same factors as the FICO score, but in different weighting – it places more emphasis on credit card balances and credit utilization rate. Of course, there are other scoring models out there as well, but these are the two most commonly used ones.
Check your credit report for errors and dispute them if necessary
Everyone should check their credit report regularly for errors. When you review your report, look for incorrect information, such as missed payments that you actually made on time or accounts that aren’t yours. If you find any errors, dispute them with the credit bureau. You can do this online, and it’s usually free.
Be sure to include any supporting documentation, such as canceled checks or payment history. The credit bureau will investigate the error and make any necessary corrections to your report. By taking these steps, you can help ensure that your credit report is accurate and up-to-date.
Pay your bills on time, every time
Paying your bills on time is important for several reasons. First, it helps you avoid late fees and other penalties, which can get you further into debt. Secondly, it preserves your credit score, which can save you money in the long run. Finally, it shows creditors that you’re responsible and trustworthy, which can make it easier to get loans and other lines of credit in the future.
Paying your bills on time is simply good financial planning. By staying on top of your payments, you can avoid getting into debt or falling behind on your finances. So make a point of being prompt with your payments – it’s good for your wallet and your peace of mind.
Don’t max out your credit cards
Credit cards can be a great tool for managing your finances, but it’s important to use them wisely. One of the worst things you can do is max out your credit limit. This can have a number of negative consequences. For one thing, it can hurt your credit score, making it harder to get approved for future loans or lines of credit. Additionally, maxing out your credit card can also trigger high interest rates, late fees, and other penalties. So if you’re using a credit card, be sure to keep your balance well below your limit. This will help you avoid financial trouble and keep your credit score healthy.
Don’t open too many new accounts at once
Whenever you open a new credit card account, the issuer will likely pull your credit report. This is what’s known as a hard credit check, and it can temporarily affect your credit score. If you’re planning to apply for a major loan in the near future, such as a mortgage, you’ll want to avoid opening any new lines of credit, as this could further lower your score and make it more difficult to qualify for the best terms.
Instead, focus on building up the credit you already have by using your cards responsibly. By taking these steps, you can help ensure that your credit stays in good shape, and help make it easier to get the financing you need down the road.
