If you are still a bit confused about how credit score works, then you should take a look at this simple guide! Here you will learn what a credit score means and quick methods to improve it.
We've prepared this mini-guide for those interested in learning how credit scores work, which are its most common misconceptions and how you can improve your score in record time.
What does my credit score mean?
Your credit score informs lenders and other interested parties of your credit risk. The algorithms, based on a number of factors, are designed to predict your future behavior and indicate whether you are likely to have trouble (or not) paying back a loan.
The Fair Isaac Corporation, (FICO) is the most widely used producer of consumer credit scores that businesses use when deciding to issue credit.
If you have seen that the score provided by sites like Credit Karma, for example, is different from scores like myFICO, it is because most free credit score sites use VantageScores, while others simply use an adjusted version of your FICO score.
VantageScore is a credit card rating that was developed by the three major credit bureaus (Experian, TransUnion and Equifax) and is used, as an alternative to FICO scores, by lenders, landlords and financial institutions to evaluate creditworthiness. The big advantage it offers is that it is free to the credit monitoring services so there’s a smaller burden on you.
The main difference is that VantageScore prefers not to use percentages to describe how much weight it gives various credit factors, as FICO does, but instead describes them in terms of influence.
Still, the factors that matter most in FICO scores are also the most heavily weighted for VantageScores and for both, the single most important thing consumers can do to help their scores is to pay on time.
Three misconceptions about credit score
Our valuation as borrowers is measured through credit reports, so it is really important to fully understand how they work because lenders will check your score before signing the approval of a loan or before you can rent an apartment on your own.
However, there are many things that are said about credit scores and some of them are not entirely true. Here’s a list of the 3 most common misconceptions about credit reports:
There’s only one credit score
On the contrary, there are several ways of calculating a person’s credit score. The most popular one is FICO, with a score range from 300 to 850. The higher the number, the better your image as a borrower. Keep in mind that scores from different companies may vary by several points.
Checking your credit will lower your score
We hear this a lot, but this is not entirely true. There are two ways of requesting a credit score: soft inquiry and hard inquiry.
A soft inquiry is the one that you can request yourself, and it’s usually the one requested by most companies unless you apply for a loan. This type of inquiry will not affect your score.
On the other hand, a hard inquiry is the one requested when you apply for a loan. This type of inquire will lower your score a few points, so you need to think carefully before you request loans.
Closing credit accounts will improve your score
This is probably the biggest misconception consumers have. The truth is that closing your credit accounts might have the opposite effect because it decreases the amount of credit available to you in relation to the balances you owe. The higher the ratio is, the lower your rating will be.
How to improve your credit score ASAP
Improving your credit score may take more time than you think, so if your plans include making major purchases you will need to do something fast!
The first thing you should do is organize yourself, learn from others who have already had successful experiences improving their scores. Don't get lost in complicated strategies, you need to keep it simple and stay patient in order to achieve it fast.
Check the following tactics and improve your credit score:
Stop depending on credit
One of the main reasons you've probably ended up having a low credit score is because you are too dependent on credit cards and have trouble keeping up with the payments.
The best thing to do in this case is to consolidate your credit card debt and only use one. You can also pay most of them, but you need to avoid making just the minimum payment! If you keep on doing this it will probably take years to pay off those credit balances.
Leave your bills on auto-pay
If you are willing to improve your score you will have to pay your bills on time, so make sure you set up automatic payments. Auto-pay is the best solution for those who tend to be late on payments!
You just need to set the payment and that's all! You will also want to make sure that you have enough cash in your account by that time of the month you've set the auto-pay.
Become an authorized user
This tactic can be useful when you need to start building credit. Through this option, you will be able to purchase with your own credit card, but the owner of the account will be responsible to make the payments.
Start by looking for a friend or a family member that can add you as an authorized user. Then you can begin building your credit score over time.
Don't discard your credit history
Keep good-standing credit cards! They can prove the lenders that you have been able to commit to payments in the past for an extended period.
If your plans don't involve this credit card you can leave it at home, but don't close it! (Unless it charges extra fees)