How to Improve Your Credit Score

By MicaR | Online Venture | 9 Feb 2024

A credit score is given by a credit bureau after analyzing the financial status of a person. This includes the use of credit cards and loans. The more access you have to credit, the better will be your score, however, you will also have to pay your loan and credit card bills to improve your credit score. Having a good credit score means you will have access to credit scores such as credit cards and loans. Some landlords also analyze credit scores in order to determine whether the person is appropriate for renting the house or apartment. When your credit score is low, you do not have access to financial services.

How a Credit Score is Calculated?

A credit score is a number that tells about the creditworthiness of a person. Creditworthiness means whether the person is eligible for credit facilities or not. The credit score is a number between 300 and 850 and is computed by analyzing a person’s credit report. The higher the score, the better it is.

A higher credit score signifies that the person is more likely to repay his/her debts on time, less likely to default on the loan, and less of a risk for lenders to lend money.

There are many ways to improve your credit score, but here are some of the most common ways:

The credit score is given by a credit bureau. In the United States, the three major credit bureaus are Equifax, Experian, and TransUnion. These organizations collect information about a person’s finances through lenders (credit card companies, banks, financial institutions, etc.) and create a report. In the report, they will list all the loans a person has taken, how much money the person owes to the creditors, how much available credit the person has used, if the person has any unpaid bills if there are any court judgments against the person, etc.

This credit report helps the lenders decide if the person can be trusted for a credit or loan in the future.

How to Improve Your Credit Score

A credit score is a financial report based on the use of credit facilities such as loans and credit cards by an individual. Higher credit scores mean you have good financial standing, and lower credit score means you have poor financial standing. If your credit score is poor, you need to improve it. You can improve your credit score in three ways: frequently borrow money from banks and use credit cards (borrowing indicates that you are in a good position to pay back), pay your loan and credit card bills on time (you are financially sound), and don't use more than 30 percent of your credit card limit. When you do not pay the loan on time, your credit score will fall. If you only pay the minimum amount due for your credit card, your credit score will never improve. When you use the maximum amount of available credit, your credit score will fall. Avoid these things.

Your credit score will be determined by a number of factors such as your loan and repayment, credit card usage and bill payment, and all other outstanding credits. If you have never taken any loans and never used a credit card, the credit bureau cannot compound your credit score. In order to improve your credit score, you need to get loans multiple times, you need to pay your loans on time, you need to use credit cards, and never use credit cards more than 30 percent of the available limit, always pay your full bill amount on time. If you are broke and if you are not using any financial services, loans, and credit cards, how can a credit bureau analyze your credit reports and create a credit score for you? A credit score is not related to your financial status, it is in fact related to how you access credit services and how you pay your debts.

How to Use Credit Card Properly

Generally speaking, you get two types of cards from banks, debit cards, and credit cards. A debit card is just like cash, the only difference is how you use it. A debit card is linked to your bank account and every time you use your debit card, you will be paying from your bank account. Therefore whether you use cash or debit cards you are actually using your own money. However, a credit card is bank's money, you use your bank's money to make purchases, and you get a payment window of 30-45 days, if you pay within this period you do not incur any extra fees, but if you don't pay within the time, you will pay interest on the amount spent.

Benefits of Using Credit Cards

One of the primary benefits of using credit cards is you earn reward points for each purchase. These reward points can be later converted to cash or gift points that you can use to make other purchases. Another benefit of using a credit card is your credit score will improve. The more you use your credit cards, the better will be your credit score provided your credit card expenses are kept under 30 percent of your credit limit, and you pay your credit card bill in full within the payment period. The validity of reward points depends on the policy of your credit card company.

Every time you use a credit card, you will earn reward points that you can either convert to gift vouchers for various services or even convert to cash. This is the most evident benefit of using a credit card. Another major benefit is you get an interest-free payment window of 30-45 days, in other words, you make a purchase now, and you can pay back the credit card bills after 30-45 days. In the meantime, you can use your cash to make extra money. When you use your credit cards wisely, your credit score will improve and if you want to get a loan, a good credit score can really help.

How to Get Out of Credit Card Debt

The reason why people get into credit card debt is that people spend more than they can afford to pay. When people are using a credit card, they are under the false assumption momentarily that it is free money, therefore, they tend to buy non-essential items, items that they don't actually need. Anything that does not help you to live is non-essential. For example, you can live without drinking coffee or soda, therefore, you should stop spending on items like these. If you are already in credit card debt, cut your expenses by at least 50 percent and start paying off your debt.

Never use more than 30 percent of your credit card limit. By doing so you will be reducing your credit score even when you are paying your bills regularly. Never withdraw cash through your credit card even when this feature is available on your card. Never pay the minimum due even if your card company allows you to do so, pay your entire bill. Never miss your payment date and always pay your bills within your payment window term. Don't use too many credit cards if your finances are not very good. Always track your expenses and do not spend on unwanted items.

How to Use Credit Cards Properly

If you are using a credit card, you need to remember a couple of things, first of all, even if you can pay the minimum due, you should always try to pay the full bill amount because that’s how your credit score will improve. Secondly, you should never spend more than 80 percent of your card limit. Thirdly, you get a free interest period for bill payments, and you should utilize it. If you pay the minimum bill, you will be paying high interest on your remaining bill amount. If you don’t even pay the minimum due, you will incur higher charges and you might lose your credit card. 

You need to pay credit card bills every month for two purposes, one, to improve your credit score, and two, to avoid paying late fees or fines. When you pay your credit card bills within the time frame, your credit score will improve. When your credit score improves, you will have better access to financial services, it will be easier for you to get a loan in the future. When you don't pay your bills on time, you will have to pay interest on your bill amount, the interest rate on credit card loans is very high, and some credit card companies charge additional fines and late fees.

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