Credit is basically the practice of borrowing money, with the promise of paying off the debt within a stipulated amount of time. Consumers, purchasers, and business ventures alike are highly dependent on credit in the present day.
The entire system of the availability of credit, and the time period of the acceptance of an offer is dependent on your credit score. The failure to do that adds to the overdue sum of a certain amount of interest. Defaulting on a regular basis on the payment of overdue bills and debts leads to a low credit score. A low credit score hampers your purchasing power for future credits and the availability of loans. Having an excellent credit score is a must for the availability of loans and credit for the purchase of something exclusive.
The credit score is a statistical method to ascertain the individual’s intention and ability to the repayment of the money owed by him/her. There are a number of credit bureaus that evaluate your personal report and send you the score. Every organization follows different evaluation systems, and the calculation is based on a wide variety of factors.
Role of Credit Score
The first thing which is checked by the credit issuer after receiving your loan or card application is your credit score. The process is the same when you are applying for a card, a loan, or a mortgage. Credit reports and credit scores are markers that enable a financial institution to check your reliability for paying off the debt on time. It gives indications of your intention and repayment ability to the financial institutions. The major importance of the credit score is thus the risk assessment of the individual or the asset.
Good Credit Score Advantages
Having a good credit score will help you in getting the grants without much of a hassle since you will be assessed to be of lower risk. More importantly, you will be asked to pay off your debt at lower interest rates.
LOW CREDIT SCORE
If you are amongst the lower credit scorers you need to improve on it. This is because of the fact that your application might not be rejected outright if you do not fit the high standards, but the credit you get will be laced with a high-interest rate compared to someone who has a better credit score. Thus, the lower the credit score, the higher the rate of interest, which eventually results in a higher monthly payment.
In addition to credit scores, banks & other financial entities may also use other internal scoring mechanisms to establish the creditworthiness of an individual.
Components of Credit Score
In order to improve or maintain a good credit score it is very important to know the various components of a credit score. It is only when you know the potential areas of improvement that you will be able to devise a plan to achieve a better credit score if it has gone lower. The following are the main factors of evaluation for credit scores:
- Credit repayment history of the individual.
- Current debts/repayment liabilities of the individual
- Duration of time of credit history
- Credit mix
- Frequency of applications of new credits.
Ways to increase your credit score quickly
Building a good credit score takes years of maintaining good habits of repayments & right intention. However, within a reasonable time, there are a few things you can do to give your score a boost before applying for a mortgage.
1. Dispute credit report errors.
You should start by getting a copy of your credit report and looking for any mistakes. There may be errors on your credit report that could negatively impact your score. Review your credit reports for errors. Look through each report for mistakes such as incorrect name or address, credit lines that don’t belong to you, duplicate entries, incorrect account status, and other errors that could lead to a lower score.
Since each credit bureau collects and reports credit information independently, you’ll need to check all three reports. If you find a mistake, you’ll also need to dispute it with each bureau. Each one has a slightly different process for disputing errors, but instructions can easily be found on their websites.
2. Pay down some debt.
Once you have checked your credit reports are up-to-date and accurate, try to reduce the amount of debt you owe.
One of the major deciding factors in applying for a mortgage is your debt-to-income ratio. This number measures how much of your monthly income goes toward paying back debts and what is the surplus.
Lenders prefer that your total debt payments take up a relatively small portion of your total monthly income. Eliminating a payment may help you qualify for a loan. Once you pay off a loan, that loan’s monthly payment gets closed, thus you free up that amount from your monthly burden and improve your debt-to-income ratio.
Most mortgage lenders require a back-end DTI (the total amount of income allocated toward debt, including your potential mortgage payment) of no more than 43%. So by paying down a credit card balance or paying off your car loan or personal loan, you will immediately lower your DTI and increase your chances of approval.
And though DTI doesn’t directly affect your credit score, paying down outstanding debt does. The more of your available credit you borrow against, the more it can negatively affect your score. So, by reducing how much debt you have in your name, you become a much more sought-after borrower.
3. Ask for a credit limit increase.
In addition to paying down debt, another way to improve your score instantly is by getting a credit limit increase. While this won’t change your debt-to-income ratio, it will lower your credit utilization since your outstanding debt remains the same while your available credit increases.
Often, you can request an increase and get approved instantly through your card company’s website.
Keep in mind that credit card issuers will sometimes run a credit check before granting a credit limit increase.
4. Get added as an authorized user.
Another way to instantly improve your credit is by piggybacking on someone else. You can approach a family member or a close friend with excellent credit and ask them to add you as an authorized user on one of their credit cards.
When someone adds an authorized user to a credit card, that account’s information is reported on both people’s credit reports. If you’ve added to an account with a long, clean history, it can bump your score a bit higher.
The best part is, you don’t actually need to use the credit card or even know the card’s information. The primary account holder’s activity will automatically transfer to you, too.
Credit bureaus don’t give as much weight to authorized user status as they do primary cardholder status. Still, every little bit helps. Just keep in mind that you’ll need to share both the good and the bad of that account. If the primary holder misses a payment or maxes out the card, you’ll suffer the consequences as well.
5. Request a rapid rescore.
Once you’ve done all the hard work of cleaning up your credit, you’ll want your credit scores to reflect that. That’s where rapid rescoring can help.
You might be able to use rapid rescoring to get your credit reports updated quickly (within a week or so) and receive a more favorable score. This is much faster than the weeks or months it takes for credit changes to be reflected in your score normally.