What is a Credit Score and How Does it Work?
Let’s get started by talking about what a credit score is and just why it is so important to your financial future. A credit score is a three digit number that lenders use to determine whether or not they should grant you credit.
A credit score is calculated based on the information in your credit report, which includes, among other things, your payment history and how much debt you have. The higher your score, the more likely lenders are to grant you a loan.
There are three main factors that go into calculating a credit score: payment history, debt, and recent borrowing activity.
Payment History
This is the biggest ranking factor and the easiest for you to manipulate. All that you have to do is pay your bills on time.
On time bill payments account for one third of your credit score. Even a single late payment of 30 days can cause your credit to plummet. When you are trying to establish your credit, just keep paying your bills in a timely manner.
To make sure that you do not accidentally miss a payment, take advantage of all the tools at your disposal. The best one is automatic payments, but payment reminders can be just as handy. If a creditor ever asks to send them to you, accept.
Debt
Your debt is the next biggest factor, particularly credit card debt. Credit cards are great financial tools, but you have to limit their usage. The amount of credit you are using or credit utilization can have a huge impact on your overall score.
To be considered to have good credit utilization, you should keep your credit usage under 30 percent. To have excellent utilization, keep it under 10 percent. This means that if you have 9,000 dollars in available credit, you should be using less than 900 dollars of it.
Credit Activity
Your creditors like to see what you are doing at the moment. If you have a lot of activity, such as new accounts and inquiries, it could be a sign that you are in financial trouble.
If you plan to use your credit to make a major purchase such as a car or home, you should limit any credit activity.
How To Establish A Credit Score
The credit score is a major source of information for lenders, insurance companies, and employers. It tells whether you are likely to repay loans or if you are a risk for defaulting on your payments.
There are many benefits of having a good credit report. For example, it can help you get approved for loans and mortgages, get approved for insurance policies, and even land job offers.
If you are new to the credit world, it can seem like an impossible task to establish your credit. You might have already even applied for credit but been denied due to a lack of experience. Don’t let a recent failure stop your efforts. Here is what you need to do.
Start Small
You do not want to try to go from zero credit to trying to apply for a new car loan. You need to start small and work your way up. As an inexperienced borrower, you need to choose a credit account that is a lesser risk for the lender. Once you have established several smaller accounts, you can move on to bigger credit goals.
The easiest credit account to get is a gas card. These are usually low limit cards which will represent a low risk for the lender. Apply for one of these cards and use it regularly when you fill up. Do not make any purchases on it that you would not make with cash and simply pay the card off every month. By doing this, you will start establishing credit without being charged interest. Interest grace periods mean that you will not be charged a penny of interest as long as you pay off the balance in full each month.
After 6 months of regular use and on time bill pay, you should be able to move on to a loftier credit goal, such as an unsecured credit card from MasterCard or Visa.
Tips for Establishing Your Credit Score
Here are a few quick tips for establishing a credit report and a solid score to build upon.
First
The first thing is to open up a checking account and get a debit card. Once you have opened up your account, it will start the process of building your credit rating.
Second
The next thing that you should do is to make sure that all of your bills are paid on time in order to show good credit habits. You want to make sure that you don’t miss any payments and also pay them on time so they can’t affect your credit score.
Third
Open up some smaller credit accounts such as a gas card or department store credit card. These are usually low limit cards for less than 600 dollars, making them less risky for lenders. Only us it for purchases that you would have made in cash anyway and pay off the balance every month.
Fourth
Be patient. It takes time to establish a credit score. The important thing is that you are taking action. The earlier you establish your credit the better, especially since age of oldest account is a credit factor.
The Importance Of Establishing Your Credit Rating
Establishing your credit rating is an important step in your financial life. It gives you a better understanding of your financial status and allows you to take necessary steps to manage your finances.
The importance of establishing personal credit rating is one that cannot be understated. In today’s world, it has become easier than ever to establish a personal credit rating thanks to the internet and digital technology. More importantly, it helps you access money more easily when you need it most.
Once you have a good credit score, you will see that it opens a lot of doors. Access to inexpensive credit is a valuable thing to have on your side. Without a good score, everything in life will cost more including loans and even regular bills such as car insurance.
