Your credit score is a 3-digit number that speaks volumes of your financial condition. Credit score and credit report are two terms that are sometimes used interchangeably, though they are not the same thing. Your credit report is a document that holds details of your financial history, and the credit scores are based on them. How you utilize your credit shall ultimately determine your overall score. FICO scores are the most widely used credit score, typically ranging from 300 to 850. Credit scores are important because lenders, loan issuers, renters, and insurers always check an applicant’s credit scores before accepting them as a client.
Low Credit Score vs. High Credit Score
The higher your credit score, the better the chances of getting approved for a loan or qualifying for the best insurance rates. Individuals with high credit scores (700 and above) are subject to low interest rates, and those with a poor score (500 or below) are usually deemed incapable of returning borrowed money. A good credit score is vital to demonstrate financial stability and save money on large investments. People who file for bankruptcy witness a sharp decline in their credit score because it suggests poor financial management on their behalf.
Low credit score can render you ineligible for securing a mortgage, car lease, new credit, or any other type of loan. Any company that offers you an unsecured loan under these circumstances will levy extravagant interest rates that are essentially a death sentence for someone who is already struggling under a huge pile of debt. Therefore, it is important to improve your credit scores before applying for a new loan or credit. No matter how low your scores have fallen, you can always get them back up by making responsible financial decisions.
Ways to Improve your Credit Score
If your credit scores have recently hit rock bottom, worry not! Redeeming an excellent score will take time and effort, but you sure can do it. Here’s how:
1. Check your Credit Report for Mistakes
At times, a low credit score may not make sense and your intuition could be right. Check your credit reports regularly and thoroughly to pinpoint errors. If you notice a mistake, do not hesitate to dispute it, and if there is evidence of fraudulent activity, report it immediately. It is possible that you have been swindled by credit card theft or some other financial scam.
2. Limit your Credit Usage
If you want to improve your FICO scores, stop maxing out your credit cards. Limiting credit usage to 30% or less can substantially increase your scores over a short period of time. However, do not stop using credit entirely, as that may negatively affect your standing. You need to actually use credit in order to attain a score after all.
3. Avoid New Credit Enquires
Multiple hard enquiries for a new loan or credit can also hurt your score. Bankers and lenders will be under the impression that you are facing a financial deficit and need money to compensate. Do not close old credit accounts and open new ones as replacement. The older the credit, the better it is for your overall scores.
4. Pay your Bills on Time
Paying your bills on time is the easiest and most effective way to improve your credit score. Timely payments prevent surcharge and exhibit sound financial management.
5. Pay off Debt
Debt is detrimental to your credit score, thus paying it off will work in your favor. Try getting rid of smaller debts first and fast, rather than paying the minimum installment on all loans. Consider liquating some assets to make up for debt or apply for a debt consolidation loan.
6. Start Budgeting
If your income does not agree with your lavish lifestyle, perhaps it is time to adjust your spending habits via budgeting. You shall have to give up luxurious hobbies in order to reduce your monthly expenses and prevent the accumulation of more debt.
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John Adams is a paralegal who writes about widespread legal and social issues. He helps readers overcome challenges and solve many personal problems the smart way, rather than the hard way. He aims to reach out to individuals who are unaware of their legal rights, and make the world a better place.