What is a Credit Score?
A credit score is a number representative of an individual’s financial and credit standing and ability to obtain financial assistance from lenders. Lenders use the credit score to assess a prospective borrower’s qualification for a loan and the specific terms of the loan. Essentially, it is used to determine the borrower’s ability to pay back the borrowed amount in due time. The credit score assessment is provided by a consumer credit report agency such as Equifax and TransUnion Canada.
Who Uses Credit Scores?
Any organization that lends money as a source of business uses credit scores to assess the eligibility of a borrower. Such organizations specifically include banks, credit card companies, fintech-based lenders, insurance companies, landlords, government agencies, and mortgage companies.
It can be any individual or organization that seeks to lend someone money or enter into a contract that will require the other party to pay them back in a predetermined time.
What is a Good Credit Score?
A credit score ranges from 300 to 850. The higher your credit score, the better your standing as a borrower is. A respectable credit score is above 670.
How to Improve your Credit Score
1. Pay your bills on time
Paying off what is due on time consistently will establish your credibility as a borrower. Building your credit history takes time and steadily paying off what you owe in due time is the biggest indicator of your creditworthiness.
For lenders, past behavioral patterns are key indicators of the future. Therefore, proving to lenders that you are capable of paying back in time helps improve your credit score.
2. Reduce your overall loan amounts
Proactively paying off more than what is due will ultimately help you showcase yourself as a credible borrower, who not only pays back but also ahead of the due date. It can also decrease any interest payments for future amounts.
For example, if you have the means to prepay your mortgage, then by doing so, you are coming across as a credible borrower and your credit score will improve.
3. Manage credit cards effectively:
Credit cards, if used diligently, are an excellent way to improve your credit score. Ideally, you should not spend more than 35% of your credit limit, as a means to keep the bill under check and ensure that you are able to pay back easily the outstanding amount in time.
4. Do not buy what you can’t afford
As a golden rule, do not purchase things that you can’t immediately pay off. While buying things on credit is convenient, if there is something you cannot afford immediately with the funds available to you, it is better to look in the other direction.
Maintaining financial health is all about making the correct decisions for yourself in the longer scheme of things and not indulging in impulse purchases that you may regret later.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: