Are you planning to take out a loan soon? How about applying for a new credit card?
Before you can do any of that, there are several things that you need to consider first.
One of the most important factors that you must look into before shopping around for a lender or a credit card account is your credit score. Keeping tabs on your report is essential so you will know whether you’ll be eligible for a loan or new credit card.
Other reasons you need to check your score
Think of your credit report as an important asset. You need to protect by checking it, at least, every year. This is especially important when you’re planning to take out a bigger loan, like a mortgage or car loan. Your credit report could also be checked if you’re applying for a new job.
Here are some more reasons why you need to check your credit history often:
You were denied a loan or credit card.
If you have been rejected by a bank, lender, or credit card company, you will be given instructions on how to obtain a free report from the bureau they used to evaluate your score. You can then request a report within 60 days of rejection to better understand why you were denied.
Some of the reasons you were rejected could be too many existing accounts or there was reported delinquency in your account. By being aware of the circumstances that led to your rejection, you will know exactly how to raise your credit score.
You are trying to check for identity theft.
A lot of people think that identity theft couldn’t happen to them – until they apply for a new loan or credit card and found out they have a low score due to undiscovered fraudulent accounts in their name. If that happens, your credit report can be affected and you will have to wait for several months to contest fraudulent charges made against your account. An average of 200 to 500 hours is spent dealing with the damage caused by identity theft. Order a report of your credit history at least once a year to make sure that your account remains accurate.
You cosigned a loan.
There’s nothing wrong with cosigning a loan to help a family member or friend secure financing for something important. The problem is when they default because you’ll be held liable for the debt they have taken out and you have cosigned. Also, if your friend or relative has a habit of always being late in payment, this could appear on your credit report, too. It’s best to check your credit history from time to time so any problem can be revealed immediately. That way, you’ll also be able to make the necessary arrangements with the creditor to avoid seriously damaging your score.
You want to respond to changes right away.
If you always check your credit score, you’ll be informed immediately of any changes to your report. Because of this, you’ll be able to deal with it sooner and make the necessary steps to raise your credit score.
You want to know how certain actions affect your points.
As you keep track of your credit history, you’ll be able to tell how each of your financial transactions has affected your points. This will help you avoid doing anything that will further lower your points.
Credit score factors you need to pay attention to
To raise your credit score, you need to be fully aware of these five components.
This comprises 35% of your total credit points and is the most crucial factor. FICO factors in past long-term financial activities to forecast how well you can repay a debt. Two of the things that FICO focuses on are credit cards and installment loans. They will check how recent, severe, and frequent you have made late payments.
Credit utilization ratio
This the percentage of available credit. It comprises 30% of your total credit score. FICO considers people who keep maxing out and spending close to their credit limits as not being responsible borrowers. So be sure to maintain low credit card balances to get an ideal credit utilization ratio of 6% or less.
Length of credit history
This refers to how long each of your accounts has been open and how long since its most recent action. This makes up 15% of your total points.
The longer you have a credit account the more information lenders can base your long-term financial behavior on. But this doesn’t mean that new credit accounts can’t have a good score. All you need to do if you don’t have a credit history yet is to start using credit and keep the account for a long time.
According to FICO, this accounts for 10% of your score. If you are paying for multiple debt products, lenders will see you as a borrower who can handle a mix of credit lines well. This means that not having a credit card can be viewed as a higher risk than having multiple credit lines that are managed responsibly.
Knowing full well the weights of each of the components of a FICO credit report will help you take the necessary steps to ensure you are in good standing. This is immensely important especially for those who are looking to take out a major loan in the future.