Suppose you want to start a new business, but your savings are not enough to make your plans a reality. If that’s the case, the most practical step you can take is to apply for a business loan. However, as you communicate with the bank representative, you are told that you still have to improve your credit score to get approved.
The problem is that you don’t know what a credit score is and how to improve it. You were extremely confused and resolved to do a little research about it. Luckily for you, this article provides some basic yet most important information about credit scores.
What Is A Credit Score
A credit score is a triple-digit number that represents your creditworthiness. Most banks and financial institutions check your credit score to determine if you are legible enough to get approved for your loan application. The higher your credit score, the most likely you’ll get approved. You will also enjoy numerous financial advantages if you have a credit score of more than 670.
Your credit score is based on the financial factors reflected in your credit report, which include your payment history (35%), your credit utilization rate (30%), your inquiries and new credit (10%), the length of your credit history (15%), and the diversification of your credit (10%). If you want to know where you can access your credit report for free, you may visit the Crediful website.
FICO Score Range
The most commonly utilized credit score model by banks and other financial institutions is the FICO score that ranges from 300 to 850. These numerical values have an equivalent description or rating that determines your credit score standing. FICO defines a credit score of 300 to 579 as “poor,” 580 to 669 as “fair,” 670 to 739 as “good,” 740 to 799 as “very good,” and 800 to 850 as “exceptional.”
When you have a poor to fair credit score, you most likely have a history of not paying your loans or monthly bills on time. It would also be harder for you to obtain a loan or get approved of your loan application if you have a poor credit score.
On the contrary, if you have a good to exceptional credit score, you can enjoy many financial benefits, including having low interest rates on credit cards and loans, easier approval for apartments and homes, better car insurance rates, etc. You are also considered a responsible consumer if you have a good to exceptional credit score.
Importance Of Credit Score In Your Life
Your credit score is vital both to your financial health and your life. It is not only used to determine your chance of getting approved for your loan application, but it can also affect other factors and situations in your life.
For instance, when you are looking for a house to rent, some landlords would require you to submit your credit report to see if you can keep up with your bills and payments on time. They would check your rent-to-income ratio and credit score before they would approve you as a tenant.
Having a good to exceptional credit score would be a great advantage because the landlord would see it as evidence that you are financially capable of paying your rent every month. Aside from that, if you have a competitor interested in renting the place, you can quickly get the landlord’s approval over them if you have a better credit score than them.
Your credit score may also affect your chance of getting hired, especially if you are applying for a position in the financial industry. Most employers do a credit check on each of their applicants to assess the trustworthiness of the person they are about to hire. Thus, if you want to get hired quickly, you must maintain a good to exceptional credit score.
Effective Ways To Boost Your Credit Score
A poor credit score can reduce your chance of getting approved of your loan application and hinder you from availing yourself of the financial advantages, such as having a lower interest rate on your mortgage. Thus, if you have a poor to fair credit score, you must take some necessary steps to improve it. To help you, here are some practical tips that you may consider doing:
1. Pay Your Bills On Time
As you become older, you carry many financial responsibilities, including paying your monthly bills, such as rent, utility bills, credit card bills, and loans, on time. Since your credit history shares 35% of our credit score, paying your bills on time can significantly help improve or boost it.
If you have trouble remembering all the due dates of your payments and financial responsibilities, the best way to help you track them down is to use a calendar reminder tool or software.
2. Avoid Multiple Hard Inquiries
If you want to boost your credit score, you must avoid having too many hard inquiries. Hard inquiries are recorded and included on your credit report every time you apply for a new line of credit that allows your lenders to evaluate your credit files. Although it only shares 10% of your credit score, it would still be better if you only apply for a loan when it is significantly needed.
3. Decrease Your Credit Utilization
Your credit utilization percentage can also affect your credit score. It refers to the rate or ratio between the amount of money you spent using your credit card and the maximum balance you can have using it. So, when you are planning to improve your credit score, you must avoid overspending using your credit card. As much as possible, limit your usage to lower your credit utilization percentage.
When you apply for a loan, you will be facing terms that may seem unfamiliar to you. And credit score might be one of them. Since it is one of the most critical factors that indicate your financial health and credibility as a consumer, it would be best to familiarize the term and know what it is all about. Following the tips on how to boost your credit score mentioned above may also help you get approved for your loan application in the future.