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What is a credit score?
A composition of values being reported by lenders that gets weighted based on five categories, and a three-digit number is calculated. This calculated number becomes your credit score. Easy, right? Not so now, with the easy version, this is your credit history based on your financial preferences or credit acceptances that you had over your life.
How accurate?
Although most information is accurate, I urge you to check your credit score at least annually. There are various sites specialized in getting you your scores. There is an annual free version that you can get from this site
www.AnnualCreditReport.com (Note: Before requesting anything to any site, it is your responsibility to read and understand what you are getting in return and the cost, if any, to you.)
Remember to carefully review your credit report; start with your name, your current address, and all previous addresses that you have lived in. Make corrections as needed. Then, check your credit history. Does it list all your accounts? Do you see your credit limits, payment history, and current balance? Check for correctness. The last review consists of any remarks included by your lenders that might be considered derogatory in terms of your credit history. If you find some, talk to your lenders; most of those remarks are unsolved situations that you might resolve easily.
Can I improve my credit score?
Of course. Updates to your credit score occur constantly. Your values can go up or down based on your payments, amount of credit utilization, age of your accounts, and mix of credit lenders. Caution: Beware of companies that offer quick credit score restoration; always read the fine print and understand what you are getting into and how much it costs to you.
Tips to Improve your Credit Score
The credit score consists of various variables that are weighted; therefore, our strategy should maximize the use of those variables for our advantage. The following will help you to improve your score:
- Pay your accounts on time – building a solid payment history becomes crucial to improving your score. Lenders will first look at this part of the equation to measure the risk of getting back their money. Your chances of getting a lower rate or better credit terms improve by paying your accounts on time. This category may account for up to 35% of your credit score, which represents a very significant portion to miss.
- Keep track of the amount that you owe – your credit utilization should not pass 30%; thus, if your credit limit amounts to $10,000 (sum of all credit cards and personal loans), then your utilization should not exceed $3,000. This category may account for up to 30% of your credit score. If you find yourself with a higher ratio, do not panic; you can either ask for an increase in your limits or obtain new credit; however, do not use that extra limit. The purpose of it becomes mathematical; thus, if you had a credit limit of $10,000 and your utilization amounts to $4,500, you have a 45% ratio. Increasing your limit to $15,000 with the same $4,500 lowers your ratio to 30%. Amount owed: no difference.
- Credit history – your score will take into account the period or length of your credit history; therefore, it works to your advantage to keep older accounts. If you are closing credit accounts, try to keep older ones since this provides a longer credit history for your evaluation. Check with your lenders for the proper procedure to close credit accounts that do not represent an adverse remark to your credit history. This category may account for up to 15% of your credit score.
- Credit mix – having various types of credits available—improves your score. However, do not worry if you have one or two types of credits; do not get what you do not need. Type of credits: mortgage, personal loans, credit cards, and auto loans as such. This category may account for up to 10% of your credit score.
- New credit – the scoring companies measure and time when accounts become available on your credit. Do not open various credit accounts at the same time or within a short period. Spread your credit request over time to improve your score. This category may account for up to 10% of your credit score.
In Conclusion:
Credit scores depend on various factors that we can improve over time. Investigate your credit reports for possible errors and/or omissions. Follow the five tips, but especially pay your accounts on time and keep track of the amount you owe. These two together represent the majority of your score and most likely your best chance to obtain better deals. Always read the credit terms and conditions of any lender. Get help if you do not understand the wording or language of those terms.