Understanding Your Credit Score: How It Works and How to Improve It
Your credit score is calculated based on your financial history, which includes details such as the number of accounts you have, the total debt you carry, your payment behavior, among other factors. Lenders use this score to evaluate how likely you are to pay your debts on time.
Check out these tips to improve your credit score!
What is a credit score and how does it work? Basically, it's a rating that reflects your financial habits, such as how you manage your debts and how punctually you make payments.
The higher your score, the better your financial situation will be with creditors. If you are interested in improving your score, here is a guide with the most important aspects to take into account.
The most well-known credit scoring model was created by Fair Isaac Corp., now called FICO, and is widely used by banks and other financial institutions.
While there are other credit scoring systems, the FICO score is the most common. It ranges from 300 to 850 and can influence your ability to access loans with good rates, and even the cost of your insurance.
How does credit score impact loans and financing?
Let's say you're looking for a loan to fulfill a dream, like buying a car or a house.
Financial institutions, who are the ones who facilitate that dream, will see your credit score as a sign of how trustworthy you are.
A good score brings you closer to those goals, while a low score can create obstacles, such as higher interest rates, as the institution will want to protect itself from risk.
Why do creditors use credit scores?
Creditors use your score to decide whether to grant you products such as mortgages, personal loans or credit cards, and at what interest rates.
When you apply for a loan, your score is usually reviewed along with other information to assess whether you qualify and what the terms of the loan will be.
Scores are fairly accurate indicators of whether you'll be able to repay your loan or keep your credit card current. Lenders often set a minimum score needed to approve an application.
How does your credit score affect your ability to get credit?
A good score indicates that you have a history of reliable financial behavior: payments on time, debts under control and stable financial activity.
Institutions often offer better terms, such as lower interest rates and more favorable terms, to people with a high score.
Interest rates
The higher your score, the lower the interest rates you'll be offered because creditors trust that you're financially responsible.
It's like a relationship of trust: over time, you show that they can count on you to fulfill your commitments.
Credit limit
A high score can also increase your credit limit. This is because a positive history, with timely payments and consistent financial transactions, gives you a good reputation as a consumer.
However, institutions also consider other factors, such as your income, before defining your limit.
Three steps to improve your credit score
If your score isn't the best, don't worry. Here are some tips that can help you:
Pay on time
Being punctual with your payments is crucial. If you tend to forget, set reminders to make sure you meet due dates. This will help you build a reputation as a good payer.
Reduce your debts
Reducing your outstanding debts allows you to free up your monthly budget. It also shows that you are not overly dependent on credit and that you are keeping your finances in order.
Diversify your credit
Having different types of credit and managing them properly can improve your score.
Use credit cards responsibly and make sure your payments are up to date. Maintaining constant and organized financial activity is also positive.
With these tips, we hope you can improve your credit score and access better conditions for future financial opportunities.
Would you like to know more about how to use your credit card efficiently without getting into debt? Here is an article that may interest you.
