The Importance Of Credit Scores And How To Improve Yours

Whether you’re looking to purchase your first home, apply for a car loan, or secure the best interest rates, understanding your credit score is essential. Your credit score is a three-digit number, ranging from between 300 and 850, reflecting your ability to pay back a loan on time. The higher your credit score, the better you look to lenders, increasing your chances of being approved for loans and receiving offers with lower interest rates, saving you thousands of dollars in the long run.

Although credit scores can vary widely, certain ranges are used to distinguish between poor, fair, good or excellent scores. Though values may slightly differ at each credit bureau, a good credit score is generally between 690 to 719, with scores over 720, considered to be excellent.

Several key factors influence your credit score, and understanding them helps you to make wiser financial decisions. The most significant factor is your payment history, which makes up about 35% of your credit score. Avoiding late payments will prevent significant drops in your credit score.

Another factor to consider is your credit utilization. Though you have access to use your entire loan amount, financial experts recommend spending less than 30% of the loan value, to avoid being seen as a high risk client to lenders. Other important factors are the length of your credit history, the mix of credit types you may have, and the number of hard inquiries done on your account when opening a new line of credit. 

Choosing to engage in financial habits such paying minimum balances on time, reviewing your credit reports, and keeping your credit utilization low, helps to improve your credit score and your overall financial well being.

No matter where you are on your credit journey, there are always steps you can take to move forward, improving your financial status. Increasing your credit score doesn’t happen overnight but by implementing these expert-backed strategies, you are likely to see positive changes.

As previously mentioned, your payment history makes up the largest part of your credit score. Even one late payment can cause a drastic change to your score. Always pay the full or minimum balances and if you’re afraid of missing a payment, set up autopay. Showing lenders you can pay your bills on time, will help improve your score.

You want to be mindful before opening different credit accounts at the same time. Opening new lines of credit in a short period of time will require hard inquiries, lowering your credit score. It may give the impression to lenders that you are in a sticky financial situation, putting you at risk to pay them on time.

When you decide to open a new line of credit, search for what will work for you. Maybe, having a card with a $0 annual fee is better for you or maybe you are looking for cash back rewards on future purchases. Remember, your financial journey is personal. Make it work for you.

Instead of opening new lines of credit to have more capital or lower your credit utilization rate, try asking your current lenders to increase your credit limit.

Though you are not guaranteed credit limit increase, if you have made consistent payments or received a recent pay raise, you may be have your request easily granted. Most companies allow you to make a request over the phone or through their app if they have one.

It can be tempting to close your credit card, after paying your balance, but consider leaving that account open. Closing accounts can shorten your credit length history, potentially having a negative impact on your credit report.

Keeping accounts open for a long time will increase your credit score, showing lenders that you have experience utilizing credit, opening doors for future financial opportunities.