What’s all the hype around credit? Why are people always stressing over credit reports and credit scores? What’s the obsession with credit cards when simpler alternatives like debit cards and cash exist for purchasing stuff? A life without obligations of credit might seem simple and tension-free, but that’s not the case. If you never use credit, you won’t have a credit score, which is a fundamental requirement for acquiring any kind of loan in most countries. It might be nearly impossible to lease a car or mortgage a house if you possess no credit history. How will the lender assess your credibility or ability to pay off debt?
What is the Credit Score?
The credit score can be defined as a 3-digit number that outlines your financial condition. You may have heard people use the terms ‘credit score’ and ‘credit report’ interchangeably. While the terms are obviously related, they do not represent the same thing. The credit report is a document that summarizes your credit activity; this includes your retail transactions, history of loan payments, current balance, outstanding dues, and so on. How you utilize your credit privileges ultimately determines your credit score.
For example, if you only use a small portion of your credit allowance every month and pay it before the deadline, your credit score shall thrive. On the contrary, if you have a lot of credit card debt with the habit of exhausting your credit limit, you cannot expect a good score. The typical range for credit scores is between 300 and 850; scores below 550 are essentially poor, whereas scores above 650 are very good. If you are an expert at managing your finances, maintaining an excellent credit score won’t be a problem.
Why do I need a high Credit Score?
Whether you are dealing with a loan provider, lender, landlord/renter, or insurer, they will be looking at your credit history. If your credit score is bad or doesn’t exist, they might never agree to sign you up as a client. The greater your score, the higher are the chances of winning their approval and qualifying for a favorable payment scheme. Higher credit scores translate to low interest rates, which leads to saving tons of money in the long run. If your credit score is below 500, you shall pay excessive interest rates in case your loan application gets approved.
If you already have massive amounts of debt in your name, signing up for high-interest loan can only worsen your situation. Individuals who cannot maintain a good credit score are perceived as ‘high-risk clients’. Lending agencies are hesitant to invest in these applicants because they might never be able to pay back or could possibly file for Chapter 7 bankruptcy. Securing a mortgage, lease, new credit card, or any other type of loan can become quite a hassle if the credit score demonstrates that your finances are in jeopardy.
How can I improve my Credit Score?
If you’re not proud of your credit score right now, it’s never too late to change that. Follow these five steps to get back on track:
- Review your Credit Report
If your gut tells you that your score shouldn’t be this low, trust it. It is not uncommon to come across errors that are costing you. If you notice misinformation or suspect fraud, report it as soon as possible. Your credit score may noticeably improve when the mistakes are eliminated.
- Start Budgeting
Bad spending habits are the number one reason for a poor credit score. You will have to be somewhat thrifty if you sincerely wish to overcome your financial deficit. Customize your lifestyle to match your income and stop using credit cards to fulfill frivolous urges.
- Limit Credit Usage
The rule of thumb is to never use more than 30% of your credit limit. The lesser credit you spend, the easier it is to pay it back. On the other hand, not using credit at all is no good either. The thing is, using credit is mandatory to actually gain a score.
- Say ‘No’ to new Credit and Loans
Stop making enquiries for new credit, as they can further damage your score. Do not think about securing a new loan until you have compensated for your previous debt in full. Closing old credit accounts and replacing them with new ones will only lower your score.
- Start making Timely Payments
You know you have to pay for the debt you have already accrued, but that cannot be done unless you stop accumulating even more. Pay your current bills on time, and keep that practice alive in the future. Timely payments will steadily improve your credit score and save you from paying fines/late fees.
John Adams is a paralegal who writes about widespread legal and social issues. He helps readers overcome challenges and solve many personal problems the smart way, rather than the hard way. He aims to reach out to individuals who are unaware of their legal rights, and make the world a better place.
Last modified: November 18, 2021