Your credit score is one of the essential building blocks of your financial records. Without it, you can’t use financial products available on the market like loans, mortgages, etc. It’s like a crutch because getting almost any loan would be a breeze with a good credit score. For example, if you’re planning to buy a car or a house in the future, you’ll require a good credit score to get an auto loan or a mortgage.
With an excellent credit score, bankers and lenders know that you’ll be able to pay back the loan in full and be more lenient when it comes to the requirements or the aspects of the loan, like a lower interest rate and better repayment terms.
On the other hand, financial institutions would be more strict with a poor credit score and offer higher interest rates to balance out your credit score risks. If you currently have a poor credit score, there are things you can do to make it better in the shortest time possible. Here are some of them.
Pay Off Your Debts
Paying off your debts can bring you financial freedom and improve your credit score significantly while washing away any negative marks from your credit report. That’s especially true if you start paying off your revolving debts, such as credit cards, lines of credit, etc., on time. But where should you start? As mentioned earlier, the first debt you should pay off is revolving debts, especially credit cards.
Installment loans like mortgages, personal loans, and auto loans typically have a fixed amount and repayment schedule. On the other hand, revolving credit has a limit that you can borrow repeatedly.
The balances on either of these debts impact your credit, but revolving credit can affect it significantly. Read on to learn more about the credit utilization ratio.
Keep Credit Utilization Ratio Below 30%
Credit utilization measures the overall balance you owe compared to all of your credit limits. For example, if you have multiple credit cards but have never used them even once, you will have 0 credit utilization overall. However, if you carry balances on one or more of your cards, you utilize your credit, which impacts your credit score.
The general rule is to keep your credit utilization ratio below 30%. Anything higher on even one of your accounts will impact your credit score.
It will make lenders worry about being overextended and think you’ll have difficulty paying off your balances. Thankfully, it’s very easy to fix by paying off your outstanding loans.
You can also do this by refinancing your credit balance through a personal loan. You will consolidate your multiple loan balances into one account, the personal loan, and only have to pay a single interest, which will make it easier and faster for you to get rid of your debt.
Keep Your Old Accounts Open
Don’t close the first credit card account you got in your high school. We know it’s tempting to close an account after you’ve paid it off, but keeping it open can do wonders for your credit score. When you shut down an account, your available credit limit gets smaller, which, as we mentioned earlier, can harm your credit utilization ratio.
Another crucial aspect in determining your credit score is longevity. Your payment history and credit utilization make up a huge part of your credit score.
On the other hand, 15% of it is determined by the length of your accounts. The next time you pay off your accounts, don’t close them immediately. As long as you’re not accruing more penalties or delaying payments, you’ll be fine.
Your credit score is essential to building your financial life as it allows you to have access to most loan products. Therefore, it’s essential to maintain a good credit score if you want to have a healthy financial life.