The growing consumerism today is powered by financing products and services. Whether you are buying groceries or plane tickets, there are strong chances that you are making use of a credit score facility such as credit cards. However, as we all know, the use of credit is not just limited to credit cards. We are taking loans when we are paying for college, buying a new car, or getting a mortgage for a house. Even the cellular plans we buy can be a type of credit that we pay off over a month or a year’s time.
So is this credit facility the same for everyone in the country? Principally yes, but what is available for each individual on what terms is strongly dependent on a factor called credit score. In case you are not very familiar with it, your credit score is used to determine your creditworthiness, i.e., your individual strength to pay off your dues in time. Whenever you want to use a service in advance or get possession of a product before you pay for it, your credit score will determine if you qualify for this facility or not and what will be the cost if you do.
In simple terms, credit scores are calculated by analyzing an individual’s credit history. In the U.S., this is done by doing statistical analysis of credit files of the concerned person. This in turn determines how much probable it is for the said person to pay off their credit or bills in time. The credit score mainly draws from a credit report that is compiled by data collection agencies, typically called credit reporting agencies in the United States. For the purpose of this report, these agencies will compile relevant information on an individual’s borrowing and bill-paying habits from a variety of sources including utility companies, lenders, creditors, and even public records such as from courts. The information from this report is then statistically analyzed to predict the person’s creditworthiness in the form of a credit score.
As mentioned earlier, credit scores drive the financing we use in our lives, whether it is to buy chocolates or a house. A credit score shows the amount of risk that businesses or even individuals are undertaking when lending to us. Your credit score will determine what interest rate you will be paying to your bank on the credit card, what is the amount of the premium on your insurance policy, and what the mark-up will be on your auto loan and mortgages. In fact, you may not be even getting a mortgage or car loan if your score falls below a certain level. This makes it imperative that you maintain your credit scores so that you do not have to face a setback when you are going to make an important purchase.
FICO and Vantage Score are the two most common credit-scoring methods in use. Both models have a score range between 300 and 850, with 300 being the lowest. In either case, you would not want your credit score to be anywhere below 500 as you may not be approved for credit at all or you would have to make a deposit in order to avail the credit facility. Generally, scores over 700 are considered to be good, while individuals having 800 plus scores are considered to have excellent creditworthiness. Consumers with a good credit score will be approved for credit on competitive credit rates, while those having a score over 800 will enjoy the best terms as well as the cheapest interest rates for the products and services they are seeking credit for. On the other hand, if your score is below 700 but above 500, you may be approved for credit but you will have to bear a rate of higher interest. You may also have to face additional terms such as a large down payment.
As mentioned before, credit scores are basically calculated on your past performance on loans and your ability as well as history to pay back on these loans. Therefore, there are a lot of things that you can do to keep your credit score high and ensure your access to all types of credit financing.
- Pay Your Dues On Time
- Plan Your Monthly Expenditure
- Keeping Credit Card Bill Under 30% of Limit
The foremost behavior you need to adopt for a good credit score is never being late on your payments. These payments not only relate to paying your loan, mortgage, or credit card installments on time, but also to your phone and other utility bills. Needless to say, you should not default on any of your bill payments if you want to maintain a high credit score. Remember that credit rating agencies use a variety of public and private sources to produce your credit report so all your dues are needed to be paid within their due time.
Another habit you may consider adopting is to create a balance in your spending. A great way to do that is to plan your monthly expenses and make sure that your expenditure is in line with your income and the ability to pay back. Sometimes we are tempted to use our credit lines on unnecessary impulse purchases that end up messing up our payment schedule. Also, it is imperative that this caution is not just taken with credit, but more so with cash purchases as well. Because if we spend our cash on unnecessary products and services, then we will need to take credit for important items, and then it is the same problem again – a vicious cycle that you never want to get trapped in. Therefore, it is important not to misuse your credit facility so that you do not lose it when you need it the most.
In both these credit-scoring models, the underutilization of credit card limit is considered very important in determining a good credit score. Typically, this limit is considered to be 30% or lower (the lower, the better!). If your credit card utilization is over 30% of your limit on any credit card, then it may have an adverse effect on your credit score. It is also to be noted that even if you spend over 30% of your card and pay the bill within the due date, its effect may still be reflected in your score. In any case, even if you go beyond 30%, make sure to pay the excess amount off before your billing month closes, as usually your balance is reported to agencies with your monthly credit card statement. If your credit card limit is $10,000, it means you need to keep your monthly spending on that card to be $3000 or under.
In a nutshell, it is imperative to have a good credit score in order to enjoy the best financing facilities available. Keep monitoring your credit report and make sure to maintain a sound payment history.