Credit score not only affect your ability to borrow money but also determine the interest rate you will have to pay. Therefore, improving your credit score is an important strategy to help you borrow a larger amount of money at a more favorable interest rate. In this article, we will learn how to improve your credit score effectively and permanently.
WHAT IS CREDIT SCORE?
Before going into details about how to improve your credit score, we need to understand what a credit score is and why it is important. A credit score is a number used to reflect an individual’s financial reputation. A credit score is calculated based on factors such as payment history, current debt balance, credit usage time, and other factors related to your finances.
Credit scores are calculated on a scale of 300 to 850, with higher scores reflecting your creditworthiness and ability to repay debts. If your credit scores is high, it will be easier for you to borrow money at a low interest rate, whereas a low credit scores will make it difficult for you to borrow money.
FACTORS AFFECTING YOUR CREDIT SCORE
To improve your credit score, you need to understand the factors that affect your credit scores. These factors include:
Payment history: Your payment history plays a large role in calculating your credit scores. If you always pay your loans, credit cards, or bills on time, your credit scores will improve. On the other hand, if you have a history of late payments or bad debt, your credit score will decrease.
Current debt: Your credit utilization ratio is the ratio of how much you have used to your total credit limit. If you use too much of your credit limit, your credit score will be negatively affected. Ideally, you should keep this ratio below 30%.
Credit history: A long credit history helps you build a good credit scores. If you have old credit accounts and maintain them regularly, your credit score will improve.
Types of credit: If you use different types of credit, such as credit cards, mortgages, and personal loans, your credit scores will likely be higher. However, you need to manage them wisely to avoid overusing them and creating bad debt.
New credit requests: Every time you open a new credit account, the bank will check your credit. Too many credit requests in a short period of time can lower your credit scores.
STEPS TO IMPROVE YOUR CREDIT SCORE
To improve your credit scores, you can take the following steps:
1. PAY ON TIME
One of the most important factors that affects your credit score is your payment history. If you pay your loans, credit cards, or bills on time, your credit scores will gradually improve. On the contrary, if you pay late, your credit scores will decrease. To ensure timely payments, you can schedule automatic payments or set payment reminders.
2. REDUCE DEBT
If you have credit debt, reducing it is one of the fastest ways to improve your credit scores. Try to pay off your loans or reduce your credit card balance. One of the effective ways to reduce debt is to focus on paying off high-interest loans first. This will not only improve your credit score but also save you money on interest costs in the future.
3. MAINTAIN A LOW CREDIT UTILITY RATIO
The credit utilization ratio is one of the important factors in calculating your credit scores. You should keep this ratio below 30%, which means if you have a credit limit of VND 100 million, you should only use less than VND 30 million. If you use too much credit, the bank will consider you a high credit risk, and this will lower your credit score.
4. MAINTAIN A LONG CREDIT HISTORY
One of the factors that helps you improve your credit scores is the length of time you have used credit. If you have used credit for a long time and maintain the habit of paying on time, the bank will evaluate you as a reliable customer. Therefore, you should avoid closing old credit accounts, because it will reduce your credit history.
5. OPEN NEW CREDIT ACCOUNTS WITH A PLAN
Opening a new credit account can temporarily lower your credit scores because the bank will check your credit when you apply. However, if you open new credit accounts strategically and manage them well, your credit score will improve in the long run. One of the best ways to open credit accounts is to open a credit card with a low limit and use it responsibly.
6. CHECK YOUR CREDIT REPORT
Sometimes, your credit scores is affected by incorrect information in your credit report. Therefore, it is important to check your credit report regularly. If you find errors in your credit report, you should request a correction to avoid affecting your credit scores. You can request a free credit report from credit institutions every year.
7. USE MULTIPLE TYPES OF CREDIT
One way to improve your credit scores is to use different types of credit, such as credit cards, consumer loans, or mortgages. However, you need to manage these loans properly to avoid falling into bad debt.
CONCLUSION
Credit scores play a very important role in managing personal finances and accessing credit products. How to improve your credit scores is a question that needs to be solved by taking specific and persistent steps. By making payments on time, reducing debt, maintaining a reasonable credit utilization ratio, and checking your credit report regularly, you can improve your credit scores and improve your ability to borrow in the future. Remember, building your credit score is a long-term process, but with effort and a reasonable strategy, you will achieve good results.
