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By Citadel Financial Tips | December 23, 2019
Category: Personal Finance 101
Topic: Paying Down Debt Managing Finances Wealth Planning
Having a credit score is like a sign that you’ve made it into adulthood. But without knowing much about it, a credit score can feel like a vague, random number that follows you around, impacting your financial milestones.
You might feel like you have no control over your score, but that’s not quite true. There are a number of strategies you can implement to keep your score high, improve it if it’s low, and appeal to lenders and financial institutions. But before we get into those, you should have some baseline knowledge of how credit scores work.
What Is a Credit Score?
Credit scores are individual identifiers that qualify how much risk a person poses when being loaned money. A score is calculated by a handful of companies, primarily FICO—formerly known as the Fair Isaac Corporation. These organizations assess your past credit card, loan, and bill payment activity to determine how consistent you are at paying funds that are due.
In FICO’s case, while they don’t explicitly give out their formula, it’s common knowledge that the score calculation measures five components, each of which accounts for a different percentage of the score:
- Your payment history (35%)
- How much money you owe (30%)
- The length of your credit history (15%)
- Any new credit (10%)
- The type of credit you have (10%)
The resulting score is a number out of 850, which is close to impossible to reach. A good score can be anywhere between 670-739, and anything above that is considered very good or excellent.
What Is a Credit Score Used for?
Your credit score can be requested and evaluated by any institution that is looking to loan you money or receive regular payments from you—be it for a mortgage, business loan, credit card application, or rent. To lenders, your credit score is a statement of your level of financial responsibility. It determines your reliability as a borrower and plays a big part in how banks and other financial institutions regard you. If your score is too low, it could mean that they deny you a loan or add a considerable interest rate that might make it difficult for you to pay the loan back.
Because of a credit score’s role in big financial milestones, it’s important that you keep your score healthy. If you fail in one aspect of the evaluation, that could drag your score down and make it difficult for you to recover.
4 Ways You Can Improve Your Credit Score
If you’re looking to improve your credit score, you first have to find out what the number is. There are a couple of ways to check your credit score: you can request it from your credit card company—which might give it to you for free—or you can pay for a comprehensive credit report from one of the credit scoring companies on the market (e.g. FICO).
Having a detailed look of your credit report will help you assess where the weak points are in your finances. Depending on what those are, you can choose from the strategies below to help improve your score.
Pay Your Credit Card Bills and Loans on Time
Paying your bills in a timely manner can greatly affect your credit in the long term. Companies giving out loans will look at your previous payments as a reflection of how you might handle any future payments. Remember, 35% of your credit score relies on your payment history. Showing lenders that you are efficient with your payments will make them want to invest in you more.
Minimize Your Debt
Another big component of your credit score is the size of your debt. Paying off what you owe as quickly as possible will help to move your credit score up, making you a safer bet for lenders and landlords.
Keep Your Balances Low
Keeping the spending on your credit cards small and easy to pay off will help to manage your money. Remember that if you don’t pay your credit card statements on time, the interest can add up, even if the balance is small. Staying on top of your payments is an easy way to avoid going into any sort of debt. On top of that, low credit utilization is something lenders like to see—so try not to have more than one or two credit cards.
Make Sure your Credit Reports are Accurate
You have access to free annual credit reports, which collect all the information available in your financial accounts and are an excellent tool to analyze your spending. Your credit report will inform how you are scored, so make sure that there are no inaccuracies that could negatively impact your score. If you spot one, contact the issuing credit agency—Equifax, Experian, or TransUnion—to correct it.
At Citadel, we understand that you want to make your finances work for you. We’re here to help. Contact one of our friendly staff members to help advise you.
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