A credit score helps to determine the level of creditworthiness of a person. Knowing your credit score is very beneficial for the lenders to determine whether you are eligible for a loan, what interest rate should be applicable, and what should be the credit limit. A credit score is a three-digit number generated by a mathematical algorithm. The most common credit scoring model in the market is the FICO score. Five major components form your FICO Scores namely, payment history, debt amount, credit length, new credit, and credit mix.
Higher FICO scores decrease the risk factor.
Moreover, the credit score does not increase overnight; one has to keep patience and persistently follow a few genuine ground rules. Here are seven excellent tips to increase your credit score.
1. Improve debt to credit ratio:
You can simply raise your credit score by clearing or paying off all the previous debts, i.e., improving your debt-to-credit ratio. Missing payments is not advisable. If you plan well, you may completely clear all your debts and increase your credit score in a year. For example, if you pay your monthly bills regularly such as installment for already availed loans, it can improve your score because this changes the credit mix. Removing incorrect and negative credit reports stated by the loan agencies can help you get a better credit score. The longer is your good debt history, the better it is for your credit score.
2. Maintain a credit calendar
It is very essential to maintain a calendar in order to keep track of all the credit transactions. Ideally, you will have 45 days to pay the amount due on the credit card that you have used. Maintaining a credit calendar helps you avoid costs pertaining to late payments, and payment of a higher interest amount. If one is planning to make a substantial purchase like a car or a house, then they have to plan for a larger pile of savings. Saving is a very good idea if you want to purchase a substantial asset because it does not impact the payments of the small monthly bills. Use credit when you absolutely need to. Using credit responsibly and paying bills properly is a reflection of smart spending behavior. Sometimes we should think properly before using the credit facility so that it does not create any kind of risk factor. You can do so by planning your credit well in advance and accurately calculating your affordance. Not making payment at the right time is harmful to your credit score. Hence plan your payments with a credit calendar.
3. Avoid new and multiple credit card applications
You must avoid applying for multiple credit applications at any given point in time. The inquiries from numerous credit providers and the unnecessary burden of cross verification can have a detrimental impact on your credit score. Before you apply for any new loan, make a rational assessment of whether or not you need it. Multiple credit application can force the utility providers to check your scores. A new credit application can reduce your average credit age. This largely impacts your credit score. Hence if you want to increase your credit score, a new credit card application or multiple credit card applications are a strict no.
4. Don’t move around your debt, pay it off
To increase your credit score, you should aim at using a low proportion of credit limit of your credit card. If you revolve credit by simply using another credit card, it won’t help. Paying down of debts on time rather than moving it around should be your main objective if you want to increase your credit score. Your credit score is impacted with both the percentage of credit limit you are using and the percentage of the total credit available.
5. Pay more than the minimum
If you want to increase your credit score, it is important to pay an amount higher than the amount you actually owe each month. This can reap multiple benefits. This helps you reduce your debt load faster. If you have multiple credit balances, it is advisable to pay off more than the minimum amount due each month for one account and pay at least the minimum amount for other credit loads. Once you have paid off one loan, you can pay attention to another and then another till every penny of credit has been successfully paid off.
6. Debt to income ratio is important
A low-debt-income ratio should be maintained. The lenders and the creditors measure your credit eligibility by measuring your monthly debt against your monthly income. On the other hand higher debt-income-ratio can lead the lenders or creditors to believe that an advanced loan to you is difficult to recover. Being mindful of your credits score can allow you to assess accurately if your credit or loan application will be approved, and whether or not a lower rate of interest will be levied.
7. Become an authorized user
Becoming an authorized user on some else’s credit card account can increase your credit score. When you become an authorized user of a credit account, then that account’s payment history appears on your account too. However, this method may not work if the account holder does not pay bills on time. Delay in payment by the primary account holder can create a bad report on both your credit reports.
It is imperative for everyone to maintain a good credit score to be able to borrow money when necessary in life. This is important for your financial life. Don’t worry if you don’t have a credit score to die for, all you have to do is follow the above tips to increase your credit score and lead a secured financial life. Sitting and worrying won’t help, doing something about it will. So get started, look at your monetary obligations closely, set goals work towards them and take one step at a time.