What is a credit score used for?
- Your credit score represents how likely you are to repay debt.
- Maintaining a good credit score is important, as when it comes to qualifying for a credit card, loan or mortgage, your credit score plays a key role in the decision.
- Potential lenders want to know how trustworthy you are as a borrower, and since they don’t know you personally, they make a prediction based on your previous loan experiences and credit health.
- Your score also impacts the amount of credit a bank or lending institution is prepared to lend you, and the interest rate it will offer.
What is a good credit score?
The higher your credit score, the better. Credit Bureaus are companies that collect all of the information that appears on your credit report and decide your credit score. Each bureau can give you a different score as they use their own model in the calculation and have different data on you. Banks and lenders usually have established relationships with one or more of the credit bureaus.
An example of how credit scores are presented, the Equifax credit score ranges include:
- Excellent: More than 833 – 1,200
- Very Good: 726 – 832
- Good: 622 – 725
- Average: 510 – 621
- Below Average/Weak: 0 – 509
There’s no standard credit score that will guarantee you approval for a loan or credit card, but the closer your score is to 1000 the better.
How to improve your credit score?
Your credit score can change even month-to-month, so there are plenty of opportunities to make you more credit-worthy.
Here are seven tips to do so:
- Lower your credit card limits
Reducing your credit card’s borrowing capacity can help you avoid temptation and instead focus on minimising any debts you may already have. - Pay your credit card & other loans off on time & in full
Having a record of consistent and prompt payments will increase your trustworthiness. - Pay your rent and bills on time
Again, having a record of consistent and prompt payments will increase your trustworthiness. - Pay off any outstanding loans and debts
Any outstanding debts or overdue payments remain on your credit report for five years and will reduce your creditworthiness. - Limit your credit enquiries
Too many credit enquiries from a third party such as a bank (on your behalf when you apply for a loan or credit card) can suggest that you aren’t able to manage your finances. - Attempt to have a consistently low balance on your credit card
A lower credit utilisation (your credit card balance compared to your credit limit) demonstrates that you can responsibly use credit and that you haven’t overextended yourself. - Keep “good” credit accounts where you have continuously paid on time and in full
The longer a credit account is upheld without any negative reports, the more it can improve your credit score.