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Your credit score may not be something that you think about too often. This is probably true of many people, but surprisingly, your credit score can have a pretty big influence on your daily life, especially at milestone moments. So, what is a credit score, why does it matter, and how can you actively work on improving it? Understanding the answers to these questions puts you at a significant advantage as you progress through life. Keep reading to discover more about the importance of credit scores and what they mean to you.
What is a Credit Score?
Before we dive deeper into credit scores, it’s helpful to clarify precisely what they are. You’ve probably heard the term ‘credit score’ frequently, but you may be less sure of what it means precisely.
Your credit score is essentially a rating of your credit worthiness. The credit score is represented as a number. The higher the number, the better your credit score is, and the lower the number, the weaker the credit score is.
A credit score is determined by a number of variables, these include:
- How long your credit history is.
- How much debt you currently have.
- Whether you have missed payment deadlines on your current debts.
- How many years long your credit history is.
- Whether you have recently applied for further credit and undergone a credit search.
Why Does Your Credit Score Matter?
This number determines how likely you are to be authorized with credit by a lender if you apply for it. For example, if you want to take out a loan or get a new credit card, the lender will carry out a credit check on you. If your credit score is healthy, you’ll likely be approved to receive the credit card or loan. If your credit score is low, you are more likely to be turned down.
Practical Ways to Grow Your Credit Score
Everyone wants to have a credit score that is as high as possible. A high credit score gives you the best chance of accessing the best rates on financial products and being approved to borrow in the first place. However, knowing how to grow your credit score and how to avoid damaging it can be a tricky balance. With this in mind, here are some of the practical ways you can grow your credit score:
Always Make Payments on Time
Ensuring that you always make repayments on your debts on time is essential. Missing payments whether accidentally or because you can’t afford to pay, can have a disastrous impact on your credit score. So, always ensure that you make your repayments. It’s helpful to set a calender reminder or to make a note in your diary if you’re concerned that you may forget to pay on time.
Use a Rent Reporting Service
Using credit sensibly can be a helpful way to build your credit score. However, you may not want to take out loans or attempt to apply for a credit card merely for the sake of it. One alternative way to work on building your credit score is to utilize something that you probably already do: pay rent. Signing up to a rent reporting service can help you to build your credit while ensuring that your rent is always paid on time. Using rent reporting services enables you to build your credit rating month-by-month, and without the need to take on any extra debt to do it. This is especially useful if you don’t have a credit history, for example, you’re fresh out of college and renting your first property. Subscribing to a rent reporting service is also helpful if you have a low credit score that you want to improve, but you don’t want to take on any added debt or damage your credit score further by going through a credit check.
Check for Credit Report Errors
Noticing that your credit score is low, but having no idea why can be incredibly frustrating. If you have always made all your payments on time, and haven’t taken on more credit than you can afford, there may be other issues at play. Occasionally, a low credit score can be caused by an error in the credit report. So, if you think this could be the problem with your credit score, then taking action to rectify the error is important.
Credit report errors can be caused in several different ways. Firstly, a late payment may be recorded in error, even when a payment was made on time. Secondly, you may have been a victim of identity theft, for example, someone else may have applied for a loan or credit card in your name without your knowledge. Lastly, your credit report may have become mixed up with that of someone who previously lived at your address, or with someone who has a name similar to yours.
If you spot one of these potential errors with your credit report it could be wise to launch a complaint. Your credit report should contain information and directions on what to do if you need to raise a dispute and spot a discrepancy on your report.
Avoid Getting Too Close to Your Credit Limit
When you have lots of credit options available to you it can be tempting to try and capitalize on this by making full us of them all. Unfortunately, applying for lots of credit and getting close to your credit limit can be seriously damaging to your credit score. So, it’s best to avoid doing this wherever possible.
As you can see, your credit limit has a significant impact on your ability to do many of the important things in life. From renting your first home, getting approved for a mortgage, or borrowing some money, each of these activities requires you to have a strong credit score. So, it’s worth being aware of the different factors that can help or harm your credit score. You can then actively try to build your credit to a healthy score.