As consumers, our credit score plays a crucial role in our financial lives. A credit score is a three-digit number that represents our creditworthiness and helps lenders, landlords, and other financial institutions determine our creditworthiness. Building and maintaining a strong credit score is essential for financial stability and access to credit. In this blog post, we will discuss how to build a strong credit score.
- Understand Your Credit Score
Before you can start building your credit score, it's essential to understand what it is and how it's calculated. A credit score is calculated based on your credit report, which includes your credit history, credit utilization, payment history, and other factors. The most common credit scoring model is FICO, and the scores range from 300 to 850. In general, a score of at least 700 is acceptable, while a score of at least 800 is exceptional.
2. Establish Credit
If you're just starting out, you may not have a credit history yet. To establish credit, you can start with a secured credit card or a credit builder loan. A guarantee is needed for a secured credit card, and that amount serves as your credit limit. By using a secured credit card responsibly, you can build your credit history and eventually qualify for an unsecured credit card.
A loan type created to aid in credit building is known as a credit builder loan. Unlike traditional loans, the money isn't given to you upfront. Instead, it's deposited into a savings account, and you make monthly payments on the loan. Once the loan is paid off, you get the money, and the payments are reported to the credit bureaus.
3. Make On-Time Payments
Making on-time payments is the most crucial factor in building a strong credit score. Late payments can stay on your credit report for up to seven years and can significantly impact your score. Make sure to pay your bills on time, including credit cards, loans, and other bills like rent or utilities.
4. Keep Your Credit Utilization Low
A guarantee is needed for a secured credit card, and that amount serves as your credit limit. In other words, it means not using up all of the credit that is available to you. Keeping your credit utilization low is another essential factor in building a strong credit score. Your credit usage should probably be below 30%. For example, if you have a credit card with a N1,000,000 limit, you should try to keep your balance below N300,000.
5. Don't Close Old Credit Accounts
Your credit score may suffer if you close outdated credit accounts. The duration of your credit history accounts for a portion of your credit score. If you close an old credit account, it shortens your credit history, which can lower your score. Instead of closing old credit accounts, try to use them occasionally and pay them off in full each month.
6. Apply for credit only when necessary
A hard inquiry is made on your credit report every time you ask for credit, which might harm your credit score. It's essential to apply for credit only when necessary and avoid applying for multiple credit cards or loans in a short period. Instead, focus on maintaining and improving your current credit accounts.
7. Increase your credit limit
Your credit score can also be raised by raising your credit limit. When your credit limit increases, your credit utilization decreases, which can positively impact your credit score. However, it's important to use your increased credit limit responsibly and avoid overspending.
8. Avoid collections and charge-offs
The sentence "Avoid collections and charge-offs" means that one should try to prevent their account from being sent to collections or charged off.
Collections occur when a creditor or debt collector attempts to collect a debt that has gone unpaid for an extended period of time. If the debt remains unpaid, it may eventually be charged off, which means the creditor has given up trying to collect the debt and considers it a loss.
Both collections and charge-offs can have negative consequences on a person's credit score and financial history, making it more difficult to obtain credit in the future. Therefore, the sentence is advising someone to take steps to prevent their account from being sent to collections or charged off, such as making payments on time and communicating with their creditors if they are having difficulty making payments.
Collections and charge-offs can significantly damage your credit score. When you fail to pay a bill, the creditor may send your account to a collections agency or charge-off your account. These negative marks can stay on your credit report for up to seven years and have a significant impact on your credit score. It's essential to avoid collections and charge-offs by paying your bills on time and communicating with your creditors if you're experiencing financial difficulties.
In conclusion, building a strong credit score takes time and effort, but it's worth it for your financial stability and access to credit. By understanding your credit score, establishing credit, making on-time payments, keeping your credit utilization low, and not closing old credit accounts, you can build and maintain a strong credit score