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How To Manage Your Credit Effectively
One of the biggest misconceptions in finance is that the more you have loans, the worse your credit score gets. That entirely incorrect. It is how you handle your loans that affect your credit score the most.
Credit scores are not about how much you owe – instead they measure how likely you are to pay it all back. That is why people who know how to use loans the right way, have excellent credit scores.
Let’s look at how loans can be used to your advantage and how it affects your credit score.
Why smart people get loans
A personal can be used in any way the borrower wants. Getting a personal loan to fund your next vacation, a renovation project, or maybe a medical emergency. That’s some of many reasons why someone gets a personal loan. But using a personal loan to consolidate multiple high-interest loans into one big loan with lower-interest? Now, that’s what I call a smart move.
How credit score work?
Know that you know how a personal loan works. Its time discuss how credit score works and how your loans will affect it.
The most common way of determining your credit score is using the FICO rating. Starting from 300 ‘til 850. 800 above being considered as “excellent”. Having an excellent score doesn’t mean that you’ll be given extra credit, but it shows lenders how well you manage your finances.
According to FICO, there are five factors that determine your credit score. These are:
Payment History (35%) – If you’ve missed a payment, or haven’t been late for more than 30 days in paying a bill, then you have an excellent payment history.
Credit Utilization (30%) – This measures how much you owe versus how much you can borrow. An example of this would be owing $800 on a $1000 limit credit card. You’re stretching your budget and is never really a good look on your credit score.
Credit History Length (15%) – In all aspects of life, experience matters, and it isn’t different in your credit scores. It’s less risky to lend someone who has years of experience compared to someone who has no history at all.
Credit Mix (10%) – This is a small part on your loans but having different loans on your record is better than having only one.
New Credit (10%) – Taking out loans on a short period of time doesn’t sit well with your credit score. It may give the impression that you are bad with your finances.
Now that you know all of this, it’s time to put it into practice and start improving your credit scores.
Does Paying Off a Bad Credit Loan Improve Your Credit Score?
Credit plays a crucial role in people’s lives these days. With your chance at getting a loan banking so much on it, it is no wonder people want to maximise their chances at improving their credit rating at every turn.
If you have recently been approved for a loan, you’re probably wondering of ways that you can use this as a chance to further improve your credit. The first thing that you’ll probably want to do is to pay it off as soon as you can. There is, after all, a lingering impression that if you pay off your debts, it should surely reflect into a better credit score.
As it turns out, this isn’t always the case. It is true that your debt-to-income ratio can affect your credit score. It is ideal for you to keep your debt utilisation below 30%. However, it will not look good for your credit profile to not have any debt at all.
Lenders are very particular of your debt management skill. While this can be seen via the way you have managed the past credits you have taken out in the past and how timely you have been in making your repayments, it would help your case more if you have open accounts now that are within the debt utilisation threshold. This will give lenders a better look at how well you can be trusted to manage your debt.
Whilst there are certain upsides to paying off a loan before its term such as the potential savings from interest rates and not having to worry about paying your debts monthly; if your goal is to make yourself look good in the eyes of potential lenders, keeping your debt may be the better strategy. You just have to see to it that you follow the loan terms to the tee and make the payments on time. Getting approved for a bigger loan next time will be so much easier.