After you graduate from school, you will never receive any grades. You don't get an A for setting up a dentist appointment and arrive on time and you don't receive an F if you burn your first meal that isn't ramen noodles. You do, however, have a different grade and grading scale to worry about. You don't receive an A, B, C, D, or an F but rather land somewhere on a spectrum between 300 - 850. Depending on where you are on the spectrum, you can either be qualified or denied any type of loan by a lender. This type of report card is called your credit score. Before we proceed, I'll go over the importance of a good credit score, how your credit score is determined, and finally discuss ways to improve or increase it.
Why your credit score is important
Having a history of credit, or a trust in which an individual borrows money from an institution and promises to pay the institution back at a later time, is essential if you ever decide to purchase a home or car, or need a loan to fund a business. The lender will view your credit score and make a decision that determines the sufficient amount of money they can lend you, the interest they will charge you, and the time span in which they expect to be paid back, without having the lender lose sleep thinking that you won't pay them back. The worse off your credit score is, the more likely you'll get rejected by lenders or pay large interest rates if you do manage to get approved. The better off your credit score, the more likely you'll be approved by lenders and have a much lower interest rates to worry about.
Determining your credit score (I'll go over these in a bit)
- How much credit you USE versus how much credit you have available. (Utilization rate for short)
- Your payments
- Length of credit history
- Having diversified credit
Increasing (or improving) your credit score
1. Utilization rate: Use a small percentage of your total/available credit and your credit score will be high. Use majority of your total/available credit and your credit score will be low. It shows institutions that you aren't too reliant on using cash that isn't yours.
2. Your payments: Pay off your credit cards and loans on time and it will help your credit score. Pay them a week or even a month after their payment date and it will hurt your credit score. It shows institutions that you're a perfect candidate and that you will pay back the money they lend you.
3. Length of credit history: The longer you've had credit under your name (and proven to be responsible with it) the higher the credit score. The shorter amount of time you've had credit under your name (typically 6 months - a year) your credit score tends to be a tad bit lower as you're only starting to begin to build credit and institutions aren't aware of how responsible you are with credit.
4. Diversified credit: Lenders will look if you have numerous lines of credit open. Such as credit cards, a mortgage, a car loan, etc. The more lines of credit you have, that are paid on time, the higher your credit score. It shows you're responsible to pay off different loans from different lenders at the same time.
5. Inquiry: For every loan or line of credit you receive, the institution will mark it as an inquiry. It's best to acquire the least amount of inquiries under a year as it shows institutions that you're pulling out debt at a slow and responsible rate. Obtaining too many inquiries under a year and an institution will think you're a risky candidate for a loan as you're pulling out too much debt in a short time span.
Comment if you have any questions or if you have any other tips that can help your credit score. Don't forget to share this article with others who could use this guide.