What does your credit score tell lenders?
Credit scores are used by lenders to measure how likely you are to pay them back should they loan you money. Creditors look to the 3 major credit bureaus: Experian, Transunion, and/or Equifax to determine creditworthiness. Lenders report to credit bureaus as often as every month, whether or not you make payments on time. There are a number of factors that contribute to your overall credit score, and if you have a low score (or no score) there are things you can do to appear more trustworthy to lenders.
The FICO (Fair Isaac Corporation) score is often the score used by mortgage, auto lender, and credit card companies. Each of the 3 major credit bureaus mentioned above will determine and report a (sometimes varied) FICO score. Your FICO score is based on information found in each of these reports using algorithms that tend to be more strict (unfavorable for you) than just the scores from the 3 big bureaus alone. With good payment history and good debt ratio, your FICO score will be favorable among lenders.
Why does your credit score matter? Not only does your credit score affect whether or not companies lend you money, it also determines how much they charge you for lending that money. Simply put, with a low credit score, you will likely be paying more for the goods and services purchased with credit than you would with a higher credit score. Often, on larger purchases like a home or a car, a lower credit score means higher interest rates or less favorable terms. Conversely, a higher credit score usually leads to lower interest rates and more favorable terms. Credit issuers see a high credit score as lower risk, so they’re willing to charge you less.
If you have no credit or bad credit, all hope is not lost! LoanMe has provided you with three things you can do to improve your score, thereby improving your chances to get approved for that loan and pay the least amount of interest.
Ways to improve your credit scores
If you have little-to-no credit and your FICO score is low (let’s say below 700), here are a couple tips to get you into that upper tier:
● Diversify the types of credit you use.
Having different types of credit will show lenders that you have earned the trust of other companies with different payment structures, and that you are able to maneuver financially should you hit hard times. Auto loans (installment credit) are a separate type of credit than credit cards (revolving credit), for example, and it is important to show that you can handle different payment options and types to lenders in order to get the most favorable terms. Having only credit cards will not show much diversity in your credit portfolio, even though revolving credit holds a high percentage of weight with your credit score.
Don’t just open accounts just for the sake of credit diversity, however. You still have to keep your accounts current and paid, and as your credit starts to build, so too will the history of those accounts.
● Don’t close older accounts, even if they are not being used.
The age of your credit accounts shows lenders that you can be trustworthy in the long-run, so don’t go closing accounts that you aren’t using. If you use a Best Buy credit card to buy a new TV, for example, don’t close the account once the TV is paid off. Even purchasing something small once a year on it and paying it off can add a positive boost to your credit score. Opening and closing credit accounts too frequently may lead lending companies to believe that you are an erratic spender, which may represent financial instability.
● Pay down your credit cards to lower your overall revolving credit balance.
Revolving credit is a type of credit with a pre-determined, maximum spending limit. You can pay down the debt in small chunks of money every month, rather than paying off the debt all at once. If you have three credit cards with $1,000 limits, and all of them currently carry a balance of $900, there is not a lot of wiggle room before you max out those accounts. Credit companies want you to show that just because you have credit out there, you aren’t going to be recklessly using it.
A common misconception about credit cards is that you have to carry a balance on them to affect (negatively or positively) your credit. Paying off credit cards monthly is as advantageous as carrying a low balance, so go ahead and pay those cards off. Your credit score will thank you.
Should you find yourself in trouble with more than one credit card, a consolidation loan can help you regain control so that those cards will be paid off, and you will be making just one payment. Consolidating credit cards can also help give your credit score a quick boost.
If you are interested in improving your credit score, paying off your debt, and/or need extra cash, contact the experts at LoanMe, and we’ll help you with your options.