The only way to build a credit history is to use the credit, and the key or essence to build good credit is to use the credit judiciously. The fact is whenever a new loan, credit card or insurance is applied for, the details reflect in the credit report. This article gives you details on what information is included in the credit report, why you may not have a credit score and what happens if you do not use the credit.
The score is calculated from several parts of the credit data, the data are grouped into five major categories which are:
- Payment history
- Amount owed on accounts
- New credit
- Length of credit history
- Types of credit used.
The importance of credit, however, differs from a particular class of people. For instance, People who have not been using their credit will be factored differently than those who have no credit history. Therefore, it is impossible to measure the importance of one factor on the credit score. Many credit card users do not know how these products and many card issuers do not do a good job explaining it to the card holders. Applying for credit does not affect the credit score, what lenders see is how much debt an individual has in his account. This is performed by computing the debt-to-credit ratio, the more the credit in the account versus the debt. Applying for credit does lower the credit score in one condition when too many credits are applied in a short span of time.
Below are 9 things that one can do to boost the credit score:
- Keep a track of the credit score
- Never miss payments
- Do not use more than 20% of the available credit
- Keep the credit cards that have no annual fees open as long as possible
- Extend the limit on existing cards then apply for new ones
- Apply for cards that have cash back rewards, this can contribute to the balance
- If you are going to miss a payment for any reason, ask for an extension in the payment plan
- Apply for a small personal loan and pay it within a year
- Transfer balance to credit card with low interest rate and higher credit
Remember credit score is an important factor in getting a loan sanctioned, after the application for a loan is filled the lender first checks the credit score and credit report of the applicant. If the score is low the lender might not even consider the application. All in all, credit score is like the first impression to the lender and determined whether an individual is credit worthy. While increased spending will not necessarily affect the credit score, an increase in the current balance of the credit card will imply increase repayment burden.
In short, credit score is like a report card that helps lender gauge the likelihood of default. So using a single credit card, shutting down the other accounts or increasing the number of cards could also affect the credit score.