Your credit score is a representation of how good you are at managing your money. But it is more than a symbolic figure. It also allows you to enjoy benefits like low interest rates and better lending terms across different credit products.
To help you understand how it all works, here’s a guide to leveraging your credit score to save big on loans.
How Does Credit Score Lead to Affordable Loans?
Typically, credit score is calculated in ranges starting from 300 and ending at 850. According to the FICO score, which is one of the most popular scoring models, a score falling between 300-629 is considered “bad,” 630-689 is deemed “fair,” 690-719 is approached as “good,” and 720-850 is viewed as “excellent.”
By getting in the ranges of “good” and “excellent” credit scores, you can show lenders that you are good with money and prove your reliability. This could help you benefit from better interest rates and terms. Simple practices like learning how to live within your means and following a budget can help you in your pursuit of affordable loans.
Can You Look Into Your Credit Score Yourself?
You can learn how to check credit score by simply reaching out to any of the three major credit reporting agencies that gather data to determine your score. You can get free weekly credit reports to keep track of your score and make sure that you can take precise actions to further improve your score into a more desirable range.
How Long Does It Take to Improve Credit Score?
The time it takes to improve your credit score depends on where it currently stands. For example, if you have a “fair” credit score with no major negative labels on your report, you may improve your credit in a few months with precise actions.
But if you have recently experienced a major financial event like filing for bankruptcy, it may take a couple of years to see major improvements for a “bad” credit score.
How to Improve Credit Score
Besides following tips from a financial advice platform, you can also embrace best practices for credit management in order to improve and maintain your credit score in the highest ranges.
This includes the following activities.
Make Payments on Time
Whether you are looking for strategies to manage high-interest loans as a medical student or finding suggestions to get the best terms on your next credit card, you need to make a habit out of making your monthly payments on time. This simple but effective step can dramatically improve your credit score over time and fetch you the benefits you want from lending products.
Don’t Close Your Oldest Account
Your credit score is also impacted by the average age of your credit history. When you close older accounts like credit cards, it lowers the average age of your credit history and leaves a negative effect on your credit score. Whether you are following the ultimate checklist for mortgage preapproval or line of credit, you should keep this tip in mind.
Maintain a Diverse Credit Mix
Your credit mix refers to the types of lending products you have in your name. As a rule of thumb, you should have at least one installment credit account like a car loan and at least one revolving credit account like a credit card. At the same time, you need to manage your finances with tools like a budgeting notebook in order to smartly consume your credit.
Utilization Only a Portion of Your Approved Credit
Speaking of smartly consuming your credit, you should use no more than 30% of your approved credit to improve your credit score. Some experts say that this threshold shouldn’t exceed 10% of your total approved credit. As a result, you may want to always follow money-management strategies rather than maxing out your credit cards.
Only Borrow When You Need It
While solutions like an AI lending marketplace might entice you to turn to borrowing for the smallest needs, this approach could backfire if you don’t have the means to pay back the money on time. Besides disrupting your finances, applying for loans at traditional institutions also creates a “hard inquiry” into your credit that lowers your score for a few months.
These tips make it easier for you to use your credit score to fetch better borrowing terms across the board. By leveraging them at important financial milestones, you can build a comfortable life for yourself.
