What Is A Credit Score?
A credit score is a number generated using a statistical formula that is applied to your credit history. This score is used to demonstrate your ability and willingness to settle debts in full and on time. Your credit score is crucial to financial issues such as mortgage repayment, credit card financing and insurance installments. Normally, credit score is tied to interests rates. You repay lower interests premiums if your credit score is high and high interest rates for low credit scores.
There are several models and methods used to calculate credit scores. These have been developed by financial institutions and credit bureaus. The most common credit score model applied is the First Isaac Corporation (FICO) model. Three other major credit bureaus; TransUnion, Equifax and Experian have also developed credit score models that are frequently used. Therefore if you need to know your credit score, it is important that you acquire reports from all three credit bureaus so as to get a more informed view.
Why Is A Good Credit Score Important?
Unless a business has had a few years of operation and has developed a proper financial track record and has a solid financial history, the proprietors credit history and credit score are what is used when looking for financing. For this reason, it is imperative to have a great credit score. Another reason to look for how to improve your credit score is to be able to negotiate better terms for your loans and mortgages.
To illustrate the importance of a good credit score, we shall make use of the FICO credit score model. The FICO method of representing credit score is a scale ranging from 300 to 850. Let us use the interest calculator on www.myfico.com. If your principal amount is US $ 6000 for a new automobile, with fixed interest rate for 5 years, your interest repaid is US $ 596 for a credit score of above 720. On the other hand if you have a credit score of below 590 you repay a whopping interest of US $ 3019!
How To Improve Your Credit Score
How to improve your credit score might be quite easy depending on your credit history. But whatever the case, a few steps in personal finance discipline are sufficient to get your credit score up and to aid you in refinancing your personal deals and business.
1. Do You Know Your Credit Score?
You can get a reliable credit report at no charge from annualcreditreport.com. This is a site set up by the three major credit bureaus under the Fair and Accurate Credit Transactions Act. Alternatively, you may sign up at other sites which offer the reports at a fee. These credit reports are important for you to understand as they are what lenders and financial institutions would use when considering your credit score and credit history.
2. Reduce credit card arrears
Although paying off debts would generally improve your credit score, it is revolving debts such as credit cards that would dramatically change the outlook of your credit score. Financiers always prefer to see borrowers who are mindful of their credit limits. It would therefore place you in good stead if you are as far off the limit as possible. The next step to take would then be to ensure that the card with high rates is paid off.
3. Cut down on credit card use
Credit bureaus normally base their scores on reports of your last available statement. Hence even if you settle your balances on time, you may find that big balances affect your credit score.
Your credit scores can be raised by creating a limit of 30% or less on your cards. You can set a personal limit or distribute the use of cards to lower the limits on each. Another way to reduce your credit balance would be to make payments just before the closing date of the statement to maximize on the effect of deposits.
4. Increase your installments
The best way of how to improve your credit is to demonstrate financial responsibility. This is with your revolving credit and paid installments. If you have a small loan that you can pay back regularly, it will be reported to credit bureaus and vastly improve your credit score. Credit unions usually have the best terms.