When you talk about your finances, it won’t be too long that you discuss the importance of your credit score. MyFICO.com explains that this is the numeric representation of a person’s credit risk or how a lender would assess the risk they will take up when they extend a loan to a potential customer. It is a snapshot of your financial behavior that lenders use to assess your creditworthiness.
A lot of factors comes into play when putting together your credit score and there are a few nationwide credit reporting bureaus that employs different formulas to ascertain the score of a consumer. But the components are pretty much the same all throughout and this is beneficial to all consumers.
These factors that are present with the way a credit score is put together by the credit reporting bureaus, consumers have a definite set of parameters to work with and are not left in the dark with how their scores are computed. Though the exact formula changes, the main factors that affects the score remains the same.
But even with this, you might be wondering why your score is an ever changing number despite the constant components put in determining the three-digit number. This can be coming from either the lenders, the credit reporting bureaus and even you as a consumer. One change in either of the three can result to a change in the credit score.
Missteps in managing your finances
But as you gain understanding with the factors that comes into play when computing for your score, you will also benefit in knowing some of the things you might be doing that are actually hurting your score. Here are some of them and try to see if you are committing some of the items in the list.
- Maxing out your credit card limit. It is tempting to use your card for all, if not most of your purchases. In fact this might even be a financial strategy on your part to take advantage of the reward points in your card. But you need to remember a few things when doing this. One is that you need to pay your balance in full every month and second, it affects your credit utilization ratio where you need to keep it at a low number to have a positive impact on your credit score.
- Co-signing on loans. Cosigning loans simply means you allow your credit profile to be used for another person’s loan application. Take a student loan for example where your children can ask that you cosign a loan for them. Although the loan is not really yours, this gets reported to the credit bureaus and non-payment adversely affects your score as well.
- Paying your bills after the due date. You might be relying too much on that grace period and your are actually courting danger when you send payments within that time frame. There might be times when you go over the due date and your lenders would be more than happy to put in a few fees on your next statement plus report you to the credit bureaus.
- Neglecting to pay your bills at all. Your credit score will take hit and descend really fast if you totally neglect your financial responsibilities. The lenders will not only report this to the bureaus but might also sell your account to collection agencies which would make your financial life a little more challenging. These collection calls can really get in your nerves and disrupt your daily schedule.
- Not checking your credit report. The FTC.gov has made it clear that the Fair Credit Reporting Act entitles consumers to a free credit report every 12 months from the nationwide credit reporting companies. Consumers need to take advantage of this report to make sure that they understand and correct any mistakes that can affect their credit score.
Meeting your payments on time
One of the factors that affects your score is if you are able to meet your payments on time. This says a lot about how you put importance with your obligations. Here are some ways to help you manage your budget a little better when it comes to payments.
- Consolidate your debts. When you are faced with multiple payment accounts, you can consolidate your debts to make repayment a little easier. With all or most of your payments under one account, you can easily monitor and send out the payments to your lenders.
- Consider applying for automatic payments. You can do this with debt consolidation to make sure that you do not forget any payments. You can easily set this up with your bank to automate your payment and make sure your credit score is protected by meeting all your financial obligations.
- Make use of technology. Mobile banking can help you monitor your account and even transfer funds with just a few clicks of a button. This helps you check and perform transactions without having to line up in your bank and make the transaction.
- Increase your monthly income. This is especially helpful when you are having a hard time making ends meet and running low on funds. It also helps you improve on your craft which can bring in added income in years to come.
Most common debt accounts in your budget
When you are trying to make sure that your credit score is spotless, it is best to understand what the most common payments are to be able to prepare for them. Here are some what expenses in your budget would look like.
- Student loans. Mainstreet.com shares that the total student loan is at $1.3 trillion and most young consumers are still paying this back to various lenders.Higher education is a great tool in trying to land in the middle class but the cost of attendance is just too much for most people that leads to take out loans.
- Credit card payments. Credit cards has been an integral part of any household’s budgeting system and the manner by which people use their cards has a direct effect on their credit score. This is a common method for payment and consumers regularly deal with the payments once a month. The idea is to pay in full the whole amount every month and never send it after the due date.
- Mortgage loan. Owning a home remains to be an American dream but with the cost of homes, most consumers take out mortgage loans that they repay back anywhere between 10 to 30 years. This remains in the budget for years to come and also affects the score of a consumer.
- Car loan. This is no longer a luxury but a need that people need to fill and using a car loan to be able to afford a brand new car is the most common approach.It might not take as long as a mortgage loan but it still presents a big amount in the budget. What some people do who needs a car but cannot afford a big amount to pay off is that they buy used cars.
Your credit score represents an important facet of your financial life and it is your responsibility to make sure that you keep it at an acceptable level. This benefits you in a lot of financial ways like reduced interest rates and fast approval on some of your financial applications.