It is important to know what a good credit score rating is, and how to get a good credit score to help you get loans easily and at lower rates.
Let’s discuss…
Fair Isaac Corporation created the credit score, often called as the FICO credit score. It ranges from 300 to 850. A higher credit score means a better credit score. If your credit score is near 700 or above, it is considered as a good credit score. 725 and above is considered very good score and anything above 750 is an excellent credit score.
You must be wondering what about a credit score of 850? Well the scoring system is such that virtually no one can ever get a perfect 850 credit score. However in real world it also does not make sense to try to get a 850 credit score as you will not be rewarded a 0 percent loan even if you have such a credit score. However it is important to maintain a credit score of 700 – 790. This will make sure you will be approved for almost all loans and with a lower interest rate. The higher the credit score the lower the interest rate (only if you bargain – else the lenders will offer you the highest possible loan rate). The responsibility lies on you to tell the lenders that you have a high credit score and they should offer you loan at lower rates. In most cases they will lower the rates if you have a good credit score. We have seen 50% reduction. But this is possible only if you have a very good credit score and great negotiating skills.
How to get a good credit score?
1) Credit Cards:
a) You probably know this but we need to tell this as its very important to maintain a good credit score – always pay your credit card dues on time and in full. If you cannot pay the full due – pay the minimum due before the last date and make sure to pay the total due as soon as possible. Also remember that if you have only paid the minimum due then you need not wait for the next billing to be generated. If you have the money pay the balance any time. Credit card companies are legally bound to accept your payment. This will help you save money on the interest for the days remaining for billing.
Reason: Simple. If you are paying your dues on time it means there is little risk in offering you a loan. Lenders will happily offer you a loan. This will also reflect on your credit score.
b) Try to keep a maximum of two credit cards. We will explain later why. If you have three or more credit cards, surrender the cards that you either do not use or use less. If you still cannot decide surrender the cards with lower credit. Of course if you really need all the cards, for example say business purposes then keep the cards.
Reason: Managing three or more credit cards is difficult. Moreover more cards mean more security issues. More credit cards also means you may spend more than you can afford to pay leading to credit card debt. Credit cards play a major role in deciding your credit score and therefore it makes sense to keep minimum number of credit cards and manage them well.
c) Do not exceed 25% of your combined credit limit of all the cards. For example if you have two credit cards each with a limit of $1000. Your combined credit limit is $2000. 25% of $2000 is $500. If you have purchased something for $100 from one credit card, you can use other credit card to purchase up to $400. Total comes to $500. You get the point?
Reason: This is common sense. If you are not exceeding 25% of your credit limit, it means you are a wealthy person and you do not “depend” on credit cards for your survival. You only use them for small purchases.
d) Use your credit cards. Credit card companies are not doing social service. Yes they do make money from the interest generated. However that’s not the only way they make money. Whenever you purchase something the merchant gets paid 98% of the price charged. 2% is shared between the credit card issuing bank (the bank that issued the credit card) and credit card issuing authority like Visa, MasterCard, Amex etc. If you do not use your credit cards, you as a customer become a liability (as there are costs involved in making, issuing, data collection and billing of credit cards). The credit card companies may not renew your credit card, leaving you with no credit.
Reason: You may have a lot of money, but if you do not have any credit how on earth you will build a credit score? This may sound strange but if you do not have credit cards or are not using them, it may negatively affect your credit score. One reason can be that lenders may not be sure if you will ever pay back the loan as you are not “accustomed to” credits.
You may have friends or you may have heard that someone was rejected for a mortgage or car loan in spite of having a good job or a lot of wealth. The reason is that they did not build their credit. If you have no credit, lenders will not give you a loan.
2) Loans:
If you have taken a loan – personal, car, mortgage or any other loan – you must ensure timely payments. Each and every payment is tracked by the credit reporting agencies. Late payments are not reported until 30 days from the due date. This is mainly to avoid the costs involved in reporting and also to maintain a good relationship with the clients.
If you are running late for a payment – make sure you are not late by 30 days to avoid the reporting that will hamper your credit score.
Also to save money you should part-pay your loans whenever you have the money to do so. If you have many loans, it’s better to part-pay the one with the highest interest rate rather than the loan amount.
If you keep paying the payments on time and also keep doing part-payments, lenders will feel safe lending you the money. This will also reflect in your credit score.
NOTE: In short if you want to get a good credit score; make sure to pay all bills on time especially if you have taken a loan from any recognized financial institution. These do not include payday loans, however they are better avoided. Because payday loans can lead you to a debt trap and this may also affect your other loans which in turn will lower your credit rating.
Remember that you are entitled to get your free credit score from the government’s AnnualCreditReport.com website. You must see your score from this website every year and report to the credit agencies if you see any errors.
Also don’t believe in any credit repairing companies. They are there to fool you and take your money. At best they can try to get any negative items removed from your report. However more often than not, they fail. You are the best person to improve your credit.
We hope this information will help you to get a good credit score. However we advise you to do further research before taking any action.
Further Reading:
http://www.bargaineering.com/articles/fico-credit-score.html
http://www.creditscoring.com/pages/bar.htm
http://www.moolanomy.com/1805/what-is-a-good-credit-score/