Understanding Your Credit Score and How to Maintain a High Rating

What is a Credit Score?

A credit score is not something that most people will think about until they want to apply for a credit card or a loan that they really need. It is a basically numerical representation of an individual’s creditworthiness and, therefore, a primary consideration for lenders.  Lenders like credit card companies and banks, engage companies to compile credit reports and derive the credit score from those reports.

Depending on your credit score, lenders may change their rates or even deny your credit card or loan application. It may be the factor that determines if you get the loan for the car or home of your dreams.

How is it computed?

While the algorithms used by the different companies vary, the credit score is generally based on five categories:

  • New Credit – How many credit (credit cards, loans, etc.) accounts were recently opened and the time between opening/applications.
  • Length of Credit History – Age of all credit accounts and date of last activity.
  • Credit Mix/Types in Use – Diversity of credit accounts.
  • Amounts Owed – Generally, this looks at the credit utilization (monthly balance vs. credit limit) and ratio of installment loan debts and initial borrowed amount.
  • Payment History – This is affected by accounts in good standing, payment delinquencies, and public records like bankruptcy.

Maintaining a High Rating

While it is not impossible to recover from a bad credit score, it is better to improve and maintain a high credit score rating. Here are some tips in maintaining a high credit score:

  1. Watch your credit cards – Keep your credit card balances low and, if possible, eliminate them. While having many credit cards does help in improving your credit score, keep in mind that you will have to manage all of these different credit cards. Keeping your number of credit cards low (ideally, one or two) will help you in managing your accounts better.
  2. Pay bills regularly – Late or missed payments can deal a big hit to your credit score as it casts doubts on your ability to pay. You normally have 30 days to make at least the minimum payment before you are considered delinquent. Make use of mobile apps and other calendar software to help you schedule and remember your payment due dates.
  3. Keep old debts in your credit history – Successfully paying off a loan should be a point of pride on your credit report. It shows that you are able to manage your debts responsibly. While you can request for old debts to be removed from your credit report, it can actually harm your credit score.
  4. Accept offers of credit limit increases – If your credit card company offers to freely increase your credit limits, by all means accept. This helps you as long as you don’t also increase your utilization needlessly. Having a low monthly balance to credit limit ratio is good for your credit score.
  5. You don’t need to owe money – One misconception that people have is that in order to apply for a reliable credit card or loan, you have to owe money. They then leave balances on their credit card or get a loan before they complete the payment on a current loan. If you can, zero out the balance on your credit card and successfully complete the payment on your current loan before applying for a new credit card or loan.

Be mindful of maintaining your credit score and, when you really need a loan or new credit card, your credit score will be your most valuable asset.

Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles by others on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com