Want to become the best candidate for loans with the lowest interests? Read here
Would you ever borrow money to someone who never gave it back? Neither would the banks, so they invented their special credit rating. A credit score symbolizes an individual’s financial reliability. All kinds of lenders estimate it before deciding on acceptable conditions they can offer to a person. The numeric values assigned to one’s credibility range from country to country. However, the essence remains the same. Banks, dealerships, private lenders and retailers estimate certain indicators of one’s financial history. This allows them to resolve which interest rate and loan term to apply to a particular case and whether the individual is trustworthy enough to give credit to at all.
The main factors of a good credit score are stable income, moderate expenses, paying on time on previous loans, small amount of money currently owed to other institutions, long and reputable credit history, and the variety of loan types you usually take (e.g. credit cards and long-term mortgage).
For some countries, credit scores are determined by certain agencies such as Fair Isaac Corporation, TransUnion or Experian in the USA, Callcredit and Equifax in the UK. In China, Ant Financial Group has developed its own Sesame Credit Score, computed from mobile transaction history which is so far frowned upon by the government. In any case, if there are certain institutions in your country that officially calculate credit scores, stop guessing and check yours.
Top tips to improve your credit score
If you believe or know for sure that your credit score is low, try to fix it as soon as possible. After all, you never know what opportunities or needs will come tomorrow and how much money you’ll require to move on. Here are some useful tips to improve your credibility as a borrower:
- Inspect your report. Most credit score data can be accessed online, so don’t be lazy and make inquiries. Check it carefully. Verify all the financial data, sums borrowed, terms of loans, repayment dates, etc. If there is a mistake, send an official request to make amendments. Supplement it with the copies of the confirming documentation – contracts, receipts, bank statements, etc. Do it regularly. When it comes to registering data, a human factor often interferes. Do not let someone’s mistakes stain your reputation. Be very attentive to your personal data, sometimes similar names get confused in the documentation. Moreover, this way you can find out about any unauthorized credit inquiries on your behalf. Prevent fraud and theft timely.
- Be punctual. Creditors don’t often believe in the rehabilitation of a person with habitual lateness. Society may give delinquents another chance, but bankers usually don’t. They track a pattern in your previous payments and assume you’ll act just the same in the future. Be responsible. This concerns all types of payments. The most obvious ones are, naturally, disbursements on other loans. However, credit agencies may take various payments into account. Surprisingly, your debt records may include everything from overdue household bills, to irregular monthly installments on your latest iPhone, missed payments on your old work phone, or even some club membership fees that you forgot about long ago. The tricky thing about monthly payments is that you’d better pay at least a minimum fee than none. Do not shy away from technology. Make your regular payments automatic via the banking app or other online facilities. If it’s not possible, set reminders on your mobile phone, or smartwatch. After all, you can put stickers on your fridge or PC display. Do not rely on your memory only, it often fails.
- Rank your payments. Not all that you owe is equally important. Big serious loans such as mortgages mean more to the creditors. How you treat them is the indicator of your earnestness. In fact, having them is not bad for credit history. Organizations understand such great sums are hard to gain at once. Simultaneously, borrowing assets for good goals such as own house, education, starting a business, etc. dignifies you as a motivated ambitious person. On the other hand, if you don’t repay your long-term loans, you risk both your securities and your ethical image. Credit card debts, in turn, do not exemplify responsible spending. Yet paying them later is not as damaging as being in default with your mortgage.
- Keep in touch with your lenders. Never avoid your credit obligations. On the other hand, if you face any difficulties repaying your debt, discuss it with the lending intermediary or organization. In fact, finding their debtors and contracting collection agencies is quite costly. You’d be surprised to know that many lenders would rather negotiate terms directly with a borrower. They may understand your circumstances and even allow some indulgence. Together, you can come up with an updated financial plan. Perhaps, they will let you defer some payments without official penalties, especially if it’s a one-time compromise against your overall good payment history.
- Pay attention to your credit cards. Yes, they give you special powers. You are never out of money. Practically, you can afford more than you currently earn. However, the size of one’s debt is critical for credit scoring. The less you overspend the better. Adhere to the golden middle – not more than 50% of your credit limit is up for a splurge. It is not a shame to utilize your credit card frequently. However, be responsible about it. If you don’t pay back on time, people doubt your financial wisdom. Remember, credit cards are not utility bills. Don’t wait until the end of the payment term to call in a credit. Do it beforehand online, or at any banking self-service terminal. That may transform a good credit score into an excellent one.
- Put all eggs in one basket. Open new credit accounts only when it’s really necessary. Owners of many small debts often forget about timely payments. Furthermore, the number of personal credit cards increases your total potential debt. That’s right; responsible authorities will access not only the existing debts, but also the amount of your possible financial liabilities. If you need a small amount of money for a while, better borrow from a friend or family than get an additional credit card. You may also consider having a secured account. This may cost more, but presents more credibility.
- Keep some old accounts. Don’t hurry up to close all your redeemed accounts. Your past activities matter a lot. Long credit history is a bonus for your future inquiries. You look like a respectable experienced borrower, especially if you kept your debts low and made timely payments. On the other hand, if you had some late payments on an account, close it as soon as you pay off the debt.
- Be careful with delinquent debts. Sometimes, lenders write off a debt as uncollectible after a long overdue term. They refer the case to a collection agency. After some time, a new financial plan may be offered and the debt will renew. For credit score determination, such old debts will look recent which is not good. It is important to check if creditors have changed the “charge-off” status of your debt to the “fully paid” after you finish paying off. If you negotiate about closing the debt without fully paying it, be aware that the lender can mark it as settled. This will not give you the best credit impression even if the creditor has no financial claims against you. Some written-off debts are actually too old to influence your credit report. Repaying your time-barred debts does not count as current. However, if you plan to repay a charged-off debt before it gets too old, collect the entire remaining sum beforehand. Full quick payment will smother the damage done by re-opening the debt.
- Decrease the credit utilization ratio. Once you don’t have too many credit accounts, it may be wise to increase your credit limit. The difference between the maximum credit limit and the amount you usually owe matters as well. So, if you regularly use money by credit card, you may as well increase your credit limit. This will automatically make up a bigger gap between the expected and the actual debts. Known as a credit utilization ratio, this difference will favor your credit score once it’s large. If you don’t want to increase your limit, simply spend less credit. (about 10-30%). Higher limits will also be nice in case you’re planning to take a significant long-term loan. High credit scores obtained by using simple tricks may help you get lower interest rates for a loan as well as better interest rates for savings accounts.
- Consolidate loans. Another strategy to improve your credit history is to consolidate your debts. That presupposes taking a new loan to be able to pay off other loans on time. When you have a single loan, you can get a lower interest rate and repay it quicker. However, be careful. Many swindlers offer consolidation services which turn out to be fraudulent. Turn only to reputable institutions and banks. Check legal documentation in the case of working with individuals.
- Take a small loan. Finally, if you don’t actually have money problems, but will soon need money for your future plans and projects, imitate positive credit activity. In other words, take small loans from time to time and repay them quickly. Work on your credit image now and you’ll be prepared for any life changes.
SEE ALSO: How to use a credit card in a smart way