2 min read • Published March 12, 22
The Importance of Credit Scores in Financial Decision-Making
What is a Credit Score?
A credit score is a numerical value assigned to individuals based on a formula that predicts their likelihood of repaying a loan. This formula considers the length of credit history, bill-paying history, current debt, number and type of loan accounts, and the proportion of available credit being used. So why does everyone tell you to build your credit score?
Why Credit Scores Matter
To start, it’s crucial to understand the role credit plays. In the United States, credit scores are crucial in determining the approval of financial products like credit cards, mortgages, and auto loans. Applicants with higher credit scores are offered more favorable terms and lower interest rates. A good credit score is essential for accessing better financial opportunities.
Building a Credit Score from Scratch or Repairing a Damaged One
Who Might Need to Build or Improve Their Credit Score?
Individuals who are young, new to the country, or have made financial mistakes in the past might lack a credit score or have a lower score than desired. In such cases, it’s essential to build or improve their credit score to increase their chances of securing loans in the future.
5 Effective Ways to Build and Boost Your Credit Score
1. Opt for a Credit-Builder Loan
A credit-builder loan is a type of loan where the lender holds the borrowed money in an account and only releases it after the loan is repaid. This is great for score building since each monthly payment is reported. Payments reported with credit bureaus help build your credit score while you save for a vehicle purchase.
2. Become an Authorized User
Ask a family member with good credit and payment history to add you as an Authorized User on their credit card. The card’s payment history will be added to your credit history, potentially boosting your credit score. You don’t need to use or have access to a credit card to benefit from the arrangement.
3. Keep up with Payments
Always make your loan and credit card payments on time. Paying at least the minimum amount will keep you in good standing. Timely payments are the most important factor in building and maintaining a healthy credit score.
4. Maintain Low Credit Card Utilization
Aim to keep your credit card utilization below 30%. For instance, if you have a card with a $1,000 limit, maintain a balance below $300 on that card. Calculated credit card utilization positively impacts your credit score.
5. Keep Credit Card Accounts Open
Even if you don’t plan on using certain credit accounts, keep them open. Closed accounts are no longer factored into your average account age and can lower that number, which is unfavorable for your credit score.
Building a Strong Credit Score for Better Loan Opportunities
A good credit score is a critical factor in securing loans in the US. While there’s no shortcut to building or improving your credit score, following the steps outlined above will help you create a solid credit history and make it easier for you to access loans in the future. Consistency and responsible financial habits are key to a better credit score over time.
CEO at XNV