Credit score is a vital parameter to measure your financial health. It tells lenders about your healthy loan practices and responsible credit behavior. But! Often, you may end up with a bad credit score with irresponsible credit behavior or unawareness of keeping your credit score good. In that case, you need to improve your credit score for better loan opportunities and approval.
However, the path leading to an improved credit score requires patience and responsible credit behavior. The below-mentioned tips will help you maintain responsible credit behavior and achieve a better credit score. But before that, let’s have a quick understanding of credit scores.
A quick sneak to credit score and its five components
A credit score is a numeric value that predicts your credit repayment behavior. The numeric value is a summary of your credit histories where a score of 300 is termed as poor, and 850 is termed as excellent.
Your credit score may fluctuate between these two values depending on timely payments, long credit history, and low credit use. The lower score tells about your bad credit behavior, which alerts lenders while they consider lending you credit. In most cases, none of the financial institutions prefers lending credit to a person with a low credit score.
But do you know how your credit score is calculated? Most of the lending organizations calculate your credit score based on five FICO components. These components are;
- Length of credit history
Length of credit history tells about the tenure of credit. The longer the tenure, the better the chances of getting a good score. Its 15% value to your credit score.
- Payment history
Payment history adds to 35% value to your credit score where your loan repayment behavior is noticed. Your credit score is an ideal reflection of your timely repayment, full balance repayment, etc.
- Credit mix
The credit mix makes 10% of your credit score value. It tells about the balance between secured and unsecured loans taken by you. A good credit mix reflects a good credit score.
- Amounts owed
The amount owed tells about your credit utilization behavior, where 30% usage of your credit is taken as a positive sign. On the contrary, utilization of credit more than 30% has a negative impact on creditors. Therefore, it is often said that a person should only utilize 30% of his/her outstanding credit. The amounts owed add 30% value to your credit score.
- Credit (new account)
Making a query of a new credit account amounts to 10% of your credit score. Putting up too many loans or credit queries frequently also hampers your credit score.
So, after understanding the five components of a credit score, let’s move to the next section. The coming-up section will describe ways to improve your credit score.
Tips to improve your lagging credit score
1. Take charge of your bill payments
As per the five components (FICO), payment history has a significant impact on your credit score. Therefore, you should always be careful while paying your credit back timely. Whether it is your old college loan or credit card bills, you should pay them on the due date or before. Paying your debts in a timely manner always works in your favor.
You can further achieve a good repayment history by setting reminders of monthly payments, activating auto-pay for on-time payments, and funding your ECS bank account timely for automated deductions.
2. Review your reports timely
Reviewing your credit score helps you a lot to understand the factors which are hurting your credit score. You can check your credit reports by pulling your credit copies from three national credit bureaus: Experian, Equifax, and TransUnion. These three are the major credit bureaus that allow free credit score check yearly.
Once you have the reports in hand, analyze the credit score hurting behavior and correct it onward. In general, you should not miss or delay debt repayments, keep your credit card balance unused (70%) and make minimal inquiries for new credit accounts.
3. Limit your new credit inquiries
Credit inquiries are typed in two ways, hard inquiries and soft inquiries. Soft inquiries include checking your credit score, allowing creditors to check your credit score, etc. In an overall sense, soft inquiries do not affect your credit score much. But! Hard inquiries do affect your credit score significantly. The impact lasts long, for one month or more than a year.
The hard inquiries include filing for an auto loan, a mortgage, a new credit card, etc. So, if you aim to improve your credit score, avoid putting up hard inquiries for the time being.
4. Aim to use only 30% of the credit
Credit utilization has a share of 30% value of your credit score. Therefore, you should keep your credit utilization low, preferably below 30%. More credit utilization makes you a credit-hungry person in front of lending institutions. So, until your credit limit is increased, limit your expenses between 10% to 30% of the total limit. Having low utilization also makes lending institutions review your credit limit after three months or so.
The process includes updating your annual household income. Many companies take up credit limit increase requests over the telephone too.
5. Improve your credit mix
Creating a healthy balance in lending patterns owes you good time during credit score calculation. A healthy credit mix or a diversified lending pattern adds 10% of the total value of credit score. A balance credit mix tells that you are a responsible borrower capable of handling multiple loans at a time.
Having a good credit mix imparts a good credit score. You can have the same by having a mix of personal loans, student loans, revolving credit lines, etc. But! You will have to be highly punctual while paying them off.
6. Always repay the debt on the due date
Every lender wants borrowers to pay on time. Well, it is a very easy task to plan or set reminders for. If you wish to have a good credit score, timely repayment on the due date is very necessary.
In case you face an issue remembering all the due dates, set payment reminders or mark your calendar for arriving due dates.
In no way should you consider delaying repayments. In the case of credit cards, you can also take the chance of paying twice during the billing cycle if you can afford it. This act of paying twice in the billing cycle also improves the chance of having a good credit score.
The final put
For a healthy financial life, improving your credit score is the least you can do. It helps you in many ways in the future when you find the need to apply for a home loan, car loan, etc.
Improving a credit score is a tough ordeal as compared to ruining it. It takes weeks and several months to reflect some noticeable changes. Therefore, plan efficiently and maintain good credit repayment behavior. Either pay on due dates or harm your credit score. The earlier one is the wise selection in the long term. You can also take the help of credit repair companies if you need any helping hands. Repairing a credit score on your own is a better selection, though.
