There is quite a lot of financial advice that you can follow. Things like managing your debt and doing research on any potential investment opportunity are both sound financial pieces of advice. However, if there is one bit of financial advice that all experts would stand by, it would be this: Get a good enough credit score.
If you are relatively new to loans and investments, you might be wondering what the point is to keeping your credit score good. Is there really a need to reach a score above the 700-range? To answer that question, it is best that we lay out a few basic principles first.
What’s a Good Credit Score?
Before we talk about the benefits of having a high enough credit score, we must first establish what passes off as a good credit score in this day and age. To do that, you must first know how you are going to be graded by the different credit reporting agencies (CRA).
Now, each CRA will have their own matrices for coming up with your grade but they tend to treat the same groups of data similarly. As such, having a good score in Experian will more or less result you in having an equally good score in Equifax and TransUnion respectively.
With that out of the way, here are how scores are being graded in all CRAs:
300-579 – Poor
580-669 – Fair
670-739 – Good
740-799 – Very Good
800- 850 – Exceptional
So, how do the CRAs come up with your score? More often than not, your score is being tabulated according to five different factors which are as follows:
Under this category, all the status of your payments will be recorded. Every payment you have made and whether or not they were made on or before the due date will be considered here. That being said, defaults, missing payments, and late payments will also be recorded here. Doing well in this category is crucial as most CRAs will get 35% of your overall score from here.
This category records how much credit you use and whether or not such usage is within or beyond your usual credit limit. This category can be tricky as non-usage of your credit cards can hurt your score as much as over-usage. As such, it is highly recommended that you learn how to manage your debts in order to not rate poorly in this category. This is also the second most important category to perform well on as most CRAs get 30% of your score from this metric.
This category will record how long you have been using credit from the first time you opened a credit account to your most recent one. Here, the “age” of your credit accounts will help you as maintaining your oldest account will gradually improve your score over time. Of course, your oldest account must not have demerits in itself so as not to off-set the benefits of its age.
Sometimes known as Credit Mix, this category will rate you according to how “diverse” your credit accounts are. Credit holders with no more than one type of credit (revolving or installment-based) tend to rate poorly here compared to those with a more diverse credit profile.
But diversity is not the only performance metric here. Your ability to manage all of your accounts by paying your dues in each will matter more in this aspect.
This category simply records your activity as a credit holder, especially the more recent ones. Whenever you open a new account, it will be recorded here.
Also, some CRAs will consider inquiries made into your profile as recent activity. Depending on the situation, your performance in this category will either improve or harm your score.
Important Note: Why learn how your score is being graded? The simple reason is that it gives you a baseline as to how you are currently faring and what you need to do in order to improve on your current score.
Is improving your score difficult? In a manner of speaking, yes. This is because you have to make several lifestyle changes that will naturally make you a more trustworthy person in the eyes of creditors. And since habit forming takes time, you will also have to wait for a while and keep adding in the necessary changes until you see considerable changes in your credit score.
What are the Advantages of a Maxed-Out Credit Score?
So what can you expect from getting a very good to exceptional credit score? The benefits you could receive depend greatly on the situation but they will more or less fall under the following:
High Interest Rates have a two-fold purpose for the creditor. First, it lets them profit from your contract with them over a long period of time. The longer it takes for you to pay the balance, the more the creditor can earn with each payment that you make. At the very least, this means that they would have gotten more than the initial balance once you have paid the final cent.
Second, that high interest rate will motivate you to clear off your balance as quickly as possible. After all, that interest rate’s existence is directly tied to the balance. If everything in the balance, you don’t have to deal with interest. Thus, you can inadvertently improve on your credit score with constant payments to an account with a high interest rate.
But if you already have a good credit score, the creditor might offer you with a lower interest rate. At this point, you don’t have much to show as proof that you are a trustworthy person since your score shows that. And the less money you have that goes to paying the interest, the more money you will have to clear off the balance.
Getting a new loan approved is going to be hard for those with poor credit scores. This all goes back to the issue of trust. Most creditors will not trust applicants with poor scores as there is not much in proof to help them determine whether or not that person is trustworthy enough to pay their dues on time.
On the other hand, a good credit score will reduce the hesitation that a potential creditor might have when looking at your application. This does not mean that your application will always be approved, however, as the creditor may have their own sources to refer to aside from your credit score. Either way, you can apply for any loan without having to be embarrassed with what your score is going to tell to the would-be creditor.
One thing that creditors will not tell you is that you can actually negotiate for the terms of your loan as not everything is set in stone. Of course, the success of your negotiations depends on the strength of your position.
Here is where a good credit score can come into play as you can negotiate the terms from a relatively strong position. For instance, if the creditor would not budge with their terms, you can always state that you have received better offers from other creditors. And aside from specific terms, you can even negotiate for other options aside from your loan.
Just do remember that a good credit score is just part of the equation for a successful negotiation. Your ability to carry yourself through a conversation and negotiate a good deal will also be important here.
The amount that you can borrow from a lender is going to be determined by your credit score as well as your regular income. A good credit score might allow you to negotiate for a higher credit limit which increases the amount that you can borrow regularly.
But what if you don’t want to borrow more? What does a higher credit score bring to you? An increase in your limit means that you have a better credit utilization rate as it would also be drastically reduced. For instance, if you have a limit at £4,000 and you usually borrow £2,000, your utilisation rate is at 50% which is still a rather high rate.
But if that limit is increased to £6,500 without any changes in your borrowing amount, your rate has now decreased to less than 30% which is far more manageable.
As of now, it is hard to find a landlord that will not screen tenants using their credit score. After all, these people depend on their monthly rent collections for a living so a trustworthy tenant is more preferable to them.
With a credit score, you can have an easier time moving to a new place as landlords will not hesitate in approving your application. In some cases, the landlord might require less paperwork from you while cutting the waiting time for your application to get approved.
A good credit score might also open you to better housing options. A lot of landlords in top-quality apartments tend to only respond to applications from people with a very good to excellent credit score. This way, you can improve on your living conditions with minimal hassle.
Lastly, rental payments will be reported by your landlord to your CRA. So as long as they are made timely, your payments can boost your credit score until you max out.
When you move and you have a low credit score, you might be asked for a security deposit. This deposit will serve as a security for the company so they can earn from you while you are still adjusting to your new living conditions.
With a good credit score, you may be able to negotiate for a lower security deposit or none at all. After all, your score can tell the utilities company that you can be trusted with monthly payments.
Supposed that you want a new phone since your current one is not in its best shape. With a bad credit score, you might not be able to avail of favorable installment plans. Instead, you might have to fork out the entire amount immediately to get your new phone.
With a good credit score, you can apply for an installment program and get that phone you want for a manageable down payment price. Once you are approved for the plan, all that you have to do is to pay your dues plus interest until you have paid off the entire balance.
Although a poor credit score rarely factors in your job approval, your report itself might provide other data that your would-be employer is looking for. Were you evicted from your last apartment unit? Did you miss several important payments? Did you lose in a rent demand case? This information will tell your would-be employer whether or not you can be trustworthy enough to work for them.
A good credit score might give the impression that you are dependable as a potential employee. At the very least, your score will not raise the employment red flags that a lot of keen employers are on the lookout for nowadays.
So what should you do then to get your credit score high enough? The following tips are known to help you improve your score but only if you are willing to devote enough time and effort.
Get a hold of your credit report to understand your current situation. Regardless of the agency preparing it, your credit report will tell you exactly what needs to be focused on in order to improve your score.
You should have a free copy of your report sent to your address once every few months. Some agencies also allow you to get a copy for a fee if you need it.
Your payment history makes up a considerable portion of your credit score. The goal here is to make constant payments on your debts until slowly clear off one debt after another.
And even if you do not clear your current debts off within a year, those constant payments will give lenders an impression that you are responsible enough to pay your dues. And speaking of debts…
You have to be strategic as to which debts you must clear first. You might want to go after the ones that are already due and have the largest amount or you could go for the smaller debts. The goal here is to give lenders the impression that you can clear off items in your current list of debts.
At the same time, you must not add new items to your list of debts while you are clearing off your current dues. This will prevent you from spending more time in a debt cycle so your money goes to better investments in the future.
As was stated, any legitimate credit building strategy is going to take a lot of time and effort. It will take multiple payments over multiple reporting periods before your score can reach a level worthy of trust from lenders.
This means that you have to commit to paying off your debts constantly, avoid creating new ones, and be smart in utilising your available credit. And also you have to avoid so called credit repair shortcuts that are being offered by dubious companies.
One mistake that a lot of new credit holders make is opening up multiple credit cards. Firstly, every credit card application you send will result in inquiries to your profile which does negatively affect your score if too many of them are done within a certain period.
And then there is the practical effect of having too many cards to manage. A seasoned credit holder will find more than three cards a chore to handle. What hope for success would a newbie have in dealing with debt coming from multiple cards.
To avoid trapping yourself to a vicious debt cycle and to help you build on good credit habits, stick to one credit card for at least 5 years. That would be enough time to learn how to become a responsible card holder while also maintaining a card with little to no demerits.
There will be instances when you cannot avoid having an outstanding credit balance. The good news is that this does not have to negatively affect your next score.
If you do have outstanding balance, you should find a way to clear it off as quickly as possible. Timely payments will matter here but the amount that you pay will be crucial. If possible, pay off more than the regular monthly amount to quickly remove chunks of the balance.
Also, if possible, make sure that the outstanding balance in your accounts do not go beyond 30% of your credit limit. This will prevent your credit utilisation rate from negatively affecting your score.
The Bottom Line
Without a doubt, there are a lot of perks to enjoy from having a good credit score. In fact, your score can be less of a detriment to you so as long as you have it at a good enough level.
But that is where the challenge lies. You will find out that building on your credit score takes a lot of time and effort. There are no shortcuts to a better score no matter what some so-called credit repair companies are telling you. Timely payments and proper debt management will do more for building your score than any alleged trick or insider info.
But once you get to the maximum credit range, the only thing left to do at that point is to maintain your score. And you will find that doing so is comparatively easier since you have developed some good financial habits at that point.