First of all, what is a credit score? A credit score is a number from 300-850 that represents a customer’s creditworthiness. The higher your credit score, the more potential a lender sees in borrowing your money. Your credit history determines your credit score, and in your credit history, factors like your repayment history, the total number of debts, etc., come up. Lenders use credit scores when borrowing out money so they know the time limit the borrower will pay back the money.
What is credité? It comes from a French word meaning ‘trust.’ It all started hundreds of years back where people had to cart their gold, and of course, needed help at some point.
What Affects the Credit Score?
- Length: This factor determines how long you’ve had your credit card. Depending on how long you’ve had the credit card that banks and business institutions can trust you with their money. So, the earlier you have a credit card, the earlier you start building your trust.
- Utilization: This factor looks at how much money from your credit line you use every month. If you open a credit card with your bank, and they give you a two thousand limit, do you end up spending the whole $2,000 every month, or you have some money left in your credit card at the end of the month?
- The less money than you use on your credit line, the better. Once you can responsibly utilize your credit line, it shows the financial institutions that they can trust you because they want to see you manage your money.
- On-time payments: Do you pay off your interests for your credit line on time every month, or you miss a few days just because you want to? Try to pay off your interests on time to gain the big institutions’ trust.
- Mix: This is a combination of the different kinds of credit you are currently on. There are different kinds of credit like an auto loan, mortgage, etc. The more mix you have of all these credits, the better history your credit establishes.
- Inquiries: When opening credit cards or inquiring about opening credit cards, don’t do so at a go or over a short time. Applying for different credit cards in just a month will trigger a warning to the bank that issues your credit. If you want to open up credit cards, space them out.
Note that closing down an inactive account can also reduce one’s credit score.
The Fair Isaac Corporation developed the credit score model, also known as FICO, and it is the most used by financial institutions, although, other credit score models. There are so many ways to increase your credit score, from repaying debts on time and staying out of debts.
- Secured card: A cash deposit usually backs this kind of card by the card owner, which will serve as collateral. It will involve you having a bank account. A secured card doesn’t have huge limits like credit cards. They usually have a $500 limit because this kind of card is not for unnecessary spending. Secured cards can help borrowers to improve their credit profiles.
- Credit cards: Credit cards usually have a $1,000–$50,000 limit. An average American has a $23,000 limit on their credit cards. A credit card also allows you to carry your balance; this means that you can take your unpaid balance to another month where the remaining balance you didn’t pay up the last time interest determines interest.
- Charge cards: These kinds of cards do not have any limit on them; this means that you can do whatever you want or buy whatever you want on this type of credit card. However, you’ll be needing to pay it off every month. This type of card can make you money.
Credit cards can help you build your business fast because once you use them for something that would bring back profit for you, it’ll help speed up the process. Credit cards are very beneficial and effective when used for business purposes.
Credit cards let you use another person’s money to grow yours.
Credit Card Myths
- Many people believe that you have to pay off your interests, especially, or a minimum payment, increasing your credit score; this is untrue.
- People believe that it will decrease your credit score when you check your score too often. It is untrue. Checking your credit score will help you manage your spending and stay on track. However, do not check it too often or make too many inquiries. There are free tools online which you can use to check your credit score.
- People believe that having fewer credit cards will increase your credit score, which is not valid. You can have as many credit cards as you want and still maintain a good score. Some people even use their credit cards to pay off other credit cards. People even make use of credit card churning to make money for themselves.
- Another credit card myth is that debt is terrible. Debt is only bad when you use it carelessly. Spending on things you know you don’t need and ending up being in a huge debt is when you can classify debt as bad. Use your debt to acquire items that you will appreciate, and therefore make you more money. Debt is the fastest and most straightforward way to build your business because it allows anybody to grow their business.
All these myths scare some people off. They run away from things that could help change their lives.
Learn to properly build your credit score because it is one factor that can either cost you a lot of money or save you a lot of money in the future. Having an excellent credit score can equal a lower interest rate on your credit card, which means you can pay much lower interest on a credit card.
As a borrower, you have to be careful about how you borrow and go into debt because it will affect your borrowing rate in the future, especially in emergencies. You can also try to pay off your interest twice a month instead of once. Do all this, and you will see that you will win every day through your credit cards instead of being the one losing.
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