Having a good credit score is important for many things in life. When my wife and I bought a car a few weeks ago, our credit scores helped determine our interest rate. When renting a home, landlords can use your credit score to decide if you’re a viable tenant. When buying a home, it has a large effect on the mortgage for which you qualify. Credit is necessary for many different aspects of your personal life.
Knowing and improving your credit score is easy if you follow a few tips.
Knowing Your Credit Score
There are a number of websites that offer credit reports. The FTC allows you to obtain your credit score once a year without a fee. Taking advantage of this is important.
Among other things, it shows you where you’ve used credit and whether you’ve made payments on time or not. You should know what to expect with your credit score. A low score will lead to difficulties financing vehicles or qualifying for the mortgage you want.
How a Credit Score is Calculated
Most credit scores are calculated using a complex algorithm. While this is a guarded secret, the FICO system offers some insight into how they score credit. They use five components: payment history, amounts owed, length of credit, new credit, and type of credit.
While other aspects, like your salary, can affect your ability to get a loan, these five components are heavily weighted in the process. By understanding how your credit is calculated, you can make better decisions about improving your score.
How to Raise Your Score
To raise your score, you should focus on the categories that affect it. My wife and I had our scores pulled when we were buying our new vehicle and found that my score was a bit higher than hers. This was because I had credit from more sources, so I had more payment history. Paying on time is also vital. Don’t take out credit if you can’t pay it back on time, as this will have a very negative effect.
The amount you owe on credit needs to be kept to a minimum. You should strive to keep your balance well below the limit. If you must spend a large chunk of your limit, you should pay it off as soon as you can. For our most recent down payment, my wife and I did this — thus getting the rewards points, but keeping our amounts owed at a normal level.
While my wife and I want to pay off our car loan early, we plan on keeping it for at least a year to show that we are responsible borrowers. This may accrue some interest we don’t want, but it’ll improve our scores and give us a better opportunity to qualify for a larger mortgage when it’s time to buy a home.
Opening a new line of credit can be helpful if you’re responsible. If you have a poor score and prove your competence by using a new credit account, you can improve your score.
My score was also higher than my wife’s because I had a number of different types of credit. We now have a joint credit card and an auto loan in addition to our separate accounts. By being responsible with our two joint loans, we can prove we are quality borrowers.
The Bottom Line
Improving your credit score is fairly simple. The most important thing is to be responsible. If you can’t afford to pay off your credit account, you shouldn’t make the purchase. Being on time, having a few different types of accounts, and making your payments on time can do leaps and bounds for your score.
What’s your experience with credit? Have you been able to improve it in the past?
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