Much as we may disapprove, many elements of our financial needs are influenced by our credit score. Starting from eligibility for a college loan to mortgage for your house, our financial behavior and resultant credit ratings haunt us every time we approach an agency to borrow money or get a credit facility. If we want better terms on our private loans, lease agreements or house mortgages, we must improve our scores.
But what exactly is a credit score?
A credit score is a number that assesses your credit risk. Your figure is compared with other people’s credit rating to see which person is a high-risk or low-risk client – generally, the higher the score, the better. Credit scoring is an exercise based on a mathematical formula that reflects your past conduct as a borrower and it is an effective risk assessment tool to forecast how you will make payments in the future. In other words, the higher the score, the better your chances of the loan being reviewed and approved, and being allotted a lesser interest rate (read why banks charge this fee).
But the big question is…
How do you Improve your credit score?
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The easy way to do it. Credit: Weheartit.com
We all want good credentials as a borrower and the following paragraphs contain some Do’s and Don’ts that serve as a road-map for you.
1. Check All Your Credit Reports
Any loan applicant’s credit rating is evaluated by banks in three ways,
a. The lending firm’s experience of dealing with you as a client – they draw up their records to see whether you were prompt in your previous payments, or have any outstanding loans.
b. Your credit application where you mention your personal details and information about sources of income – this includes proof of income legally, amount of income earned, type of income, whether you work for someone else or run your own business, etc.,
c. Credit rating agencies that maintain records of everyone’s credit score as well as basic credit histories.
Obtain details of your credit rating from these agencies periodically (usually, you can get a copy for free) and this will help you to understand your credit rating and help get rid of any mistakes made by the credit agencies.Take care of these potential roadblocks and half the battle is won.
2. Meet Loan Installment Payment Deadlines
Late or overdue payments on loan installments can significantly damage your credit score and lower your future ratings, particularly if previous creditors were not paid back by you promptly or paid back at all. Their records will show your debt as a loss, and this information is shared with credit rating agencies so make sure you stay current on your payments and bills. The best way to ensure timely payments is to set up pre-authorized payment schedule or reminders on your phone.
3. Catch Up on Your Loan Payment Schedule
In a world as uncertain as ours, it is possible that you missed a few installments on previous loans and that reduced your credit score. Luckily, credit histories are compiled over several months and your general behavior is given priority rather than the one time you didn’t cover your installment. It’s always possible to get current on your debt repayment, and if you cannot pay the full sum, just go for the minimum payment (hopefully enough to cover the interest fee) to keep the ball rolling.
4. Use Credit Cards Wisely
Many personal finance bloggers advise against using credit cards and there’s plenty of wisdom in that. But if you see yourself applying for a mortgage and have no previous credit history, chances are that the bank will treat you with skepticism. In such cases, it can be favorable and easy to build a credit profile using a credit card, by carrying out a few small-scale transactions each month. But remember to use it responsibly – pay off your bill each month and keep an eye out for rewards you could collect on the side.
5. Don’t Use Loans To Pay Down Other Loans
Avoid making payments of one debt with another debt (especially in the case of credit cards) because banks will notice your diminished repayment capacity and lower your credit score. Even if this seems to work for you in the short run, over time you’ll simply end up with more debt on your hands or a tarnished credit score.
6. Avoid Early Repayment
Contrary to general belief, early repayment of some types of debt, particularly debt related to house mortgage, hurts your credit score. The reason is simple – lenders give you money under funding arrangements at a certain cost, and early repayment disturbs these arrangements as well as the interest inflows from the loans. From a skeptic’s point of view, it simply seems another way to ensure higher bank profits through greater interest fees and if your goal is to be debt-free, it’s best to get rid of it as fast as possible, disregarding the payment schedule. However, if your goal is a better credit rating for better credit-facility terms, then perhaps sticking to the installment schedule will work better.
These suggestions aren’t an exhaustive list and if you have anymore ideas, I would love to hear them.
Credit record building is a marathon not 100 meter sprint!
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It’s tough But not impossible. Credit: Howtomanguide.com
Happy scoring.
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