A credit score will affect many of your decisions regarding your financial life and influence how banks and other financial institutions view you.
What is a Credit Score?
A credit score is an assessment of how dependable you are in fulfilling your financial responsibilities. A professional credit bureau will perform this assessment based on a number of different factors.
What Makes a Bad Credit Score?
Take a look at this sample credit report from FICO.
The factors mentioned in this report make up your credit score. The information used to calculate this score is derived from your record held by credit bureaus. Obviously, if you have a history of late repayments of bills or on your credit card, this will directly affect your credit score in a negative way.
Why a Bad Credit Score is Bad for Mortgage
Lenders will review this information very carefully and will be reluctant to lend you any money if your credit score shows you are unreliable regarding repayment. The first step in getting a home mortgage is getting a pre-approval, and this will not be possible with a bad credit score.
Tips to Improve Your Credit Score
A bad credit score can seem like the end of the world, especially when you have your mind set on becoming a homeowner. However, it isn’t a lost cause and there are a lot of small things you can do to improve your credit score. Keep in mind that improving your credit score will take time and patience.
1. Get Your Credit Report
The first step to improving a bad credit score is to get a copy of your credit report. Once you get the report, check it for errors. There have been many instances where the credit report contains errors from your repayment history. Such errors are one part of why your credit score sometimes appears lower than it really is. If you find these kinds of errors, you can dispute them with the credit bureau and get them corrected.
2. Become Consistent in Paying Bills
As discussed above, how soon you pay your bills directly contributes to a good or bad credit score. In order to improve your score, start being more consistent in your bill payments and ensure that there are no late payments.
3. Credit Cards Can Help
Contrary to popular belief, a credit card does not, in itself, negatively impact your credit score. In fact, getting a credit card can help improve your credit score dramatically. The catch is that you need to be very efficient in how you manage your credit card. For example
– Make sure you pay the credit card bill on time for an instant boost to your credit score.
– Use credit cards often because it shows lenders you are a responsible user of credit. But remember to be careful about spending only that which you are sure to repay on time.
– Keep your monthly use below 20% of your income.
– Never use your credit card to its maximum limit. It is best to use only around 50% of your card’s limit.
Remember that improving your credit is not an instant process. It takes time, patience and discipline to bring a bad credit sore up to a level where lenders will be willing to look at you favorably.
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