Small Steps to Big Credit Scores

The advertisements for companies who want to extend you credit or loans are a dime a dozen. So how do you make an informed choice about what type of credit you want? Start simple – know the importance of credit and how it can either benefit or harm your financial health and make decisions accordingly.

The first thing you need to understand is why credit is important. Once you firmly grasp how your credit impacts your daily life, you will strive to make sound decisions. Your credit is evaluated by getting an assigned number, your credit score. The higher your credit score, the more responsible you appear to potential lenders. Along with being an ideal customer for creditors, you will reap added benefits such as lower interest rates. Lower interest rates are attractive to consumers because it’s saving you money by not costing you as much to repay your debt. 

In the world today, it is not feasible to think you can get by without having to use credit. For most people, their initial experience with credit is taking out loans to help pay for college. Beyond college, owning your own home and car are also necessary functions of credit. Those are just a few more prominent examples of how credit is important in life. There are also smaller, but just as important, uses of credit, such as credit cards.

Improve Your Credit Score

Knowing your credit score is how lenders decide if you are creditworthy. You want to make sure you safeguard your financial future by using it wisely. It is worth considering that small loans to build credit can also improve your credit score. You may be wondering how that is possible. Your credit score is made up of several components to create an overall picture of your creditworthiness. In order to have an impressive score, your credit history has to include varied types of credit. 10% of your credit score is made up of the type of credit you have.

Another factor to determine your credit score is the amount of overall debt you have. Every time you pay off a balance on a credit card, or pay a loan in full, (provided you made at least the minimum payments in a timely manner), your credit score will increase. An effective way to increase the attractiveness of your credit portfolio is to take out a small loan and use the loan to pay off several credit cards and focus on the repayment of the loan. Your credit report will reflect the repayment of the credit card balances and favorably show you have paid off an outstanding debt. By taking out a loan to pay off other debt, you are also saving money by not being charged the higher interest rates that come with carrying a balance on revolving credit lines.

Every time you seek credit, the lender accesses your credit report to decide if you are what they consider creditworthy. Too many inquiries on your credit report will also adversely affect your credit rating. To avoid this pitfall, make sure you only apply for credit that you actually need. Lenders see excessive inquiries on your credit report as a potential liability and consider lending to you as high risk.

Ideally, it would be in your best interest to pay off the balance of any credit cards in full when you receive the bill. Although an ideal scenario, paying a bill off in its entirety when it is due isn’t often all that needs to be done. Just remember to be mindful of the due dates and always make at least the minimum payment on time.

Having good credit will always work in your favor. Be sure to safeguard your financial future by making sound decisions and not letting yourself become overextended. 

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