Financial setbacks in the past two years resulted in a decline in credit score or even bad credit for those whose income is badly hit by the pandemic. Given the impact of credit scores in personal finance, it is prudent to start paying more attention to it and work on getting a good score. Here is a quick look at how credit scores can impact your finances and some tips on managing them well.
What is a credit score?
According to FINRA “ A credit score is usually a three-digit number that lenders use to help them decide whether you get a mortgage, a credit card or some other line of credit, and the interest rate you are charged for this credit.” In a nutshell, it’s a reference to gauge your creditworthiness and the credit terms that can be made available to you. These scores are usually provided by credit reporting agencies that report, store and update your credit history on a regular basis.
Impact of credit scores on your finances
Most people today rely on credit cards for daily expenses and loans for long-term purchases like cars and houses. This makes credit scores very important in managing personal finances. A good credit score increases your chances of getting your credit card and loan applications approved thereby providing you with the finances you need to make a purchase. Not just that good credit scores also mean better loan terms or lower interest rates compared to those with bad credit. In order words, it can help you get your financing quicker and at a cheaper price.
Good credit score.
Credit scores are evaluated based on five major factors which include: payment history, the total amount owed, length of credit history, types of credit, and new credit. What you need to do to get a good score is to pay your debts on time, maintain a good credit utilization ratio, and have a good mix of credits in your portfolio. The FICO is a credit scoring model that features a scale of 300 to 850. A FICO credit score between 670 and 739 can be considered as a good score.
Bad credit score
At the other end of the spectrum is a bad credit rating that gives you harder access to financing and higher interest rates if you’re lucky enough to get approved. A FICO score between 300 to 669 is considered a bad rating. Such a score is usually incurred when a person fails to pay their debts on time or has a huge debt in their portfolio. In case this happens to you what you want to avoid is a downward in your finances. If you get hit by a bad credit then make haste to implement recovery measures.
Raising Your Score from Bad to Good
Bad credit doesn’t mean it’s the end of the world. It’s just a snag on your finances that you can get out of with these measures.
Eliminate Debts. Owing more than you can pay off is usually the main culprit in getting a bad credit score. What you want to do is to eliminate existing debts as fast as possible especially those with really high-interest rates. You may want to consider debt consolidation options with lower interest rates or a bad credit loan that can help you improve your situation. Click here for more information.
Check and clean credit reports. Credit reports are usually updated on a monthly basis. As such you also have a chance to improve your credit score every month. Aside from making sure that you pay your existing debts on time, you can also check for discrepancies or errors in your credit reports to make sure that they’re not adding up to your bad score.
Increase your Credit Limit
Asking for an increase in credit limit will help improve your credit utilization ratio and therefore improve your rating. However, the chances of getting an increase in credit limit may be poor if you also have a bad credit history with your credit card provider. Make sure that you pay above the minimum and pay on time so you’ll have some plus points on your end.
Access to financing tools like credit cards and loans can help you reach your financial goals faster if you are able to manage them well. For instance, taking out a mortgage for a new house can mean you won’t be paying rent anymore or an investment for your future. But sometimes unforeseen events can cause financial setbacks that make it hard to keep your good credit standing. When this happens know that you have options to help you get back on your feet.
