On an average given day, you probably don’t think about your credit score; however, when the need to borrow money arises, this three digit number suddenly becomes very important. Your credit score determines how high your interest rates will be, and ultimately, how much money a loan is going to cost you.
A credit score is the primary factor that lenders utilize to assess borrower risk before determining what an interest rate will be. A person who has a poor credit score is believed to present a higher risk for missing payments. To compensate for the perceived risk, creditors will assign he or she a higher interest rate.
The opposite is true for applicants who maintain an excellent credit score. A borrower with a higher credit score is believed to a significantly lower risk of defaulting on a loan, so he or she will be able to enjoy the most competitive interest rates.
How Your Credit Score Is Calculated
The type of credit scoring that is most frequently employed by lenders to gauge a person’s trustworthiness is called a FICO score. FICO scores range from 300 to 850.
There are also a number of other credit scoring models that are used. VantageScore 3.0 is one of the more popular methods. VantageScore is not held in as high regard as a FICO score, but the two models do share some similarities in how they are determined.
Factors that have an impact on your credit score include:
- Payment history
- Credit utilization
- The amount of debt you owe
- The age of your credit history
- The number of new accounts you have recently opened
- The type of credit accounts you have
With each of these factors taken into consideration, here are a few simple tactics you can employ to improve your credit rating and become the beneficiary of more competitive interest rates:
Request that late payments and errors be removed from your credit report.
This simple step will improve your overall credit score and increase the chances of obtaining better interest rates when you do need to borrow money.
If you find an error on your credit report, you will need to file a dispute with the corresponding credit agency. The reason why you are filing the dispute should be included. You will also need to include proof that supports your claim, and you should provide a copy of your credit report with the disputed errors circled in red.
Even if the late payments recorded on your credit report are accurate, you can always request forgiveness from the creditor. If you have been timely in paying your bills, the lender might be willing to delete late payments from your record. There is no harm in asking.
Use piggybacking off of another person’s excellent credit to improve your own score.
If the only method of improving your own credit score is to rebuild your credit history from scratch, credit piggybacking is one method of doing so. Piggybacking is defined as becoming an authorized user on another person’s credit card that is in prime standing.
When you become an authorized user, the history of the account you have been added to starts to appear on your credit history as well. Crafting an excellent credit history can take years, and piggybacking essentially offers a shortcut.
Should you decide to piggyback off of another person’s account, the account should, ideally, be a minimum of 3 to 5 years old, and it should have an excellent payment history. Because this is an element of risk associated with this option, make sure that you are piggybacking off of someone you can trust to be financially responsible with the account.
Use a secured credit card or a credit building loan to rebuild your credit.
Another method of building a positive credit history is to take out a short term, credit building loan. This type of loan is similar to a personal loan. Instead of immediately receiving funds from the loan, the money is placed in a savings account while you make monthly installment payments.
Once the loan’s terms are satisfied, you receive the cash in one lump sum, in addition to interest accrued on the savings account. The timely loan payments are added to your credit report, which helps to build or rebuild your credit history.
Credit building loans are offered only by certain credit unions and some banks. If this option is something you are interested in, talk to the banks that you currently do business with to see if they offer these services and at what cost.
Finally, a secured credit card offers another satisfactory method of building or repairing your credit. A secured credit card is one you can easily be approved for – even if you have no prior credit history. You are required to place down a cash deposit, which serves as collateral, and then your payments on the card are reported to the three credit bureaus.