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Here’s how to build your credit and improve your score

Here’s how to build your credit and improve your score Finance

Banks and financial institutions provide their customers with a direct line of credit to pay for goods and services. It can be a credit card or a loan which is taken to fulfill your personal and business needs. The line of credit is determined by a numerical representation of all relevant information to collectively determine your credibility. This number is commonly known as a credit score. It is one of the most influential factors when it comes to applying for any form of credit.

You must understand the credit scoring model designed by credit rating agencies before you can explore ways to build your credit. Take a quick look at the following breakup provided by one of the leading credit scoring models in the industry.

FICO credit rating

  • FICO considers applicants in the range of 350-579 to have a poor credit rating. According to recent statistics, 16% of the citizens cannot avail great credit facilities and services due to a poor score.
  • Applicants who score in the range of 580-669 are classified as subprime borrowers. They are eligible to avail some credit facilities and benefits owing to a fair credit rating. Approximately 17% of citizens are subprime borrowers.
  • A good credit score in the range of 670-739 helps customers avail better terms on your mortgage, credit card or any other borrowing. 21% of the applicants in the country have a good credit score.
  • A decent interest rate and favorable terms of repayment are reserved for applicants with a good credit score in the range of 740-799. 25% of the citizens in the country enjoy this benefit.
  • An exceptional credit score in the range of 800-850 allows applicants to enjoy the best rates from the top lenders in the country.
  • While FICO is the most popular and well-known scoring model for determining credit eligibility, applicants can also turn to VantageScore for an alternative assessment.

Improving your credit score
Once you know your credit score, there are simple ways to improve the same. Rebuilding credit is often a time consuming and tedious process, but nevertheless necessary to avail great credit. Banks and financial institutions will always prefer an applicant with good to excellent score as it instills a sense of confidence in the lender.

Keep cards active
You may own multiple credit cards but will predominantly use only one to pay for most of your purchases. However, that doesn’t necessarily mean you cancel your membership for the most inactive card as it can have an adverse effect on your average credit history. Note that any change in your average credit history will directly influence your credit score. It is advisable to divide your usage among all the cards you own to spend wisely and keep them all active at the same time.

Limit the number of cards
Banks and financial institutions allow balance transfers. This process transfers your debt from a high-interest credit card to one that carries a low rate of interest and boasts favorable terms of repayment. However, the temptation of owning multiple low-interest cards for consolidation of debt can have an adverse effect on your credit rating. You will still have to pay the minimum due on all cards and must keep track of payments across the board. Missed payments and penalties can bring down your credit score. It is advisable to have no more than three credit cards. You can use cards that offer attractive rewards and cashback.

Limit your card usage
A credit facility allows you to spend on goods and services but pays for the same later. It is this same temptation that can result in overspending without you not even realizing. Limited usage will help control your debt obligations significantly. So don’t use more than 30% of the total credit available in your account. Banks and credit agencies reserve the best scores for people who use up to 10% of the credit available to them.

Timely payments
Credit agencies offer you the opportunity to pay a portion of your total debt due. The rest is payable at a later date. However, you should meet your full payment obligation and not just the minimum due for the stipulated period. Meeting payments helps build a good credit line with the lender. Your lender will have more confidence in your ability to pay off bills.


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