A credit score is more than a number. It’s an analysis of your creditworthiness. Having a high score proves to lenders and financial authorities that you are a responsible, low-risk borrower. Having a low score claims the opposite.
Why is that wrong? Find out the common consequences that come with a lower credit score and what the average borrower can do to bring that score number up.
Problems That Coincide with a Low Score:
Credit scores are lumped into different categories: Excellent, Very Good, Good, Fair and Very Poor. If your credit report reveals that your score is in the Fair or Very Poor category, your personal finances might need an overhaul. Otherwise, you’re going to face some challenges in the near future.
One of the biggest side-effects of bad credit is that you’re more likely to get rejected when you apply for new credit, whether you’re hoping for a new credit card or a business loan. Lenders will check your score when they’re analyzing your application. After seeing your low number, they might declare you to be too much of a credit risk and reject your request.
Other consequences that coincide with a lower credit score:
- Higher interest rates
- Higher insurance premiums
- Higher security deposits
- Difficulty purchasing a car, renting an apartment or buying a house
If your credit report reveals a score that’s less than stellar, here are some strategies that you should adopt to move up into a better category:
Diversify Your Credit
Approximately 10% of your credit score is based on “credit mix” — this is the variety of credit accounts that you carry. It’s better to have a blend of credit types (revolving, installment and open). Relying on a single type won’t do much good for your score.
If you want to boost your score, you should try to improve the mix. So, if you think you mostly have installment credit to deal with, consider diversifying your credit by getting a personal line of credit. As far as a credit commitment goes, you only have to make repayments based on what you withdraw. So, if you don’t need to use it, you don’t have to worry about repayments.
You also don’t have to go through too much hassle to access a line of credit. Click here to see how you can apply for a personal line of credit online and find out whether you’ve been approved for the account quickly. It’s simple, fast and convenient. You don’t have to leave your front doorstep to apply.
Pay Your Bills on Time
Late bill payments will hurt your credit score. If you have a habit of paying your creditors well past the due date, you need to break it as soon as possible. Consistently making payments in-full and on-time can give your score an impressive boost.
Here are three methods that will help you make these essential payments on time:
- Use the best calendar apps to keep track of due dates and send reminders when you have to send in your payment.
- Automate payments for certain accounts, like your mortgage or your car loans. The same amount will automatically be taken from your bank account every time your payment is due.
- Start a household budget. Calculate how much you need to save to cover all of your monthly bills. It will stop you from coming up short whenever a payment is due.
Pay More Than the Minimum
Making the minimum credit card payments every time the bill is due is another bad habit that you should try to break immediately. Giving the minimum stops your repayment from being counted as late, but it won’t do much to whittle down a high balance. Maintaining a high balance on your card will negatively affect your credit score. Ideally, you should keep your credit utilization ratio well below 50%.
Keep Old Accounts Open
You’ve finally paid down the balance sitting on an old credit card. It’s taken you a long time, but you’re relieved that you’ve taken down that debt. You can finally close the account and focus on your other, newer accounts.
Before you make any drastic changes, you should know that closing old accounts is not the savviest move when it comes to your credit score. Your credit history is a significant factor for your score. The longer you have an account open, the more that it adds to your credit history. Those years of experience will come in handy. Financial experts actually recommend that you don’t close your oldest credit card so that you can reap the rewards of a lengthy credit history, even if you don’t want to put transactions on it.
It’s important to note that you should always keep an eye on the credit cards that you don’t use. Open and untracked accounts are vulnerable to identity theft.
A higher credit score comes with a lot of practical benefits: lower interest rates, lower insurance premiums, lower security deposits and greater chances of lender approvals. That’s why borrowers should work to bring their credit score into a higher category.
