Have you ever applied for a loan from a bank and wondered why you were quoted a certain interest rate? I remember when I applied for a loan to buy my first house. I had taken out a few student loans that had been paid off, but I was still making payments on my auto loan, and had a couple of open credit cards. Since I had never been late on a payment I assumed I would qualify for the lowest advertised interest rate. I had no idea what my credit score was.
After submitting my loan application, to my surprise, I wasn’t offered the lowest rate. “But why?” I asked the mortgage loan officer. I had never missed a payment on any of my loans or credit cards, and isn’t that what they should be concerned about? I was told my credit score wasn’t high enough to warrant their lowest rate.
After doing some research I discovered that one of the most important factors lenders take into account when deciding whether or not to extend credit, as well as what terms and rates will be offered, is the quality of the applicant’s credit score. And that a person’s credit score is determined by the person’s credit report.
What is a credit score?
A credit score is a numerical representation of your credit risk, which is essentially how likely you are to pay back the loan. Credit scores range from 300 to 850 (higher is better) and are used as a quick and easy way for lenders to objectively evaluate your credit risk. Most lenders require a minimum credit score before they will make you a loan, and create credit score tiers that are used to determine what interest rate they will offer. That’s why it’s important to have as high a credit score as possible before you apply for any loan, whether it is a private student loan, private student loan refinancing, or a personal loan.
What can you do to raise your credit score?
The first thing to know is it takes time to improve your credit score. While you can ruin your credit score very quickly, it can take several years of good behavior to increase your credit score, especially if you have had a credit mishap like a missed payment. Below are six suggestions to help you improve (or maintain) your credit score.
- Review your credit report annually.At least once per year, you should check your credit report to ensure it is accurate and there isn’t anything on it that shouldn’t be there. Reviewing your credit report can also help you protect yourself from identify theft, which could ruin your good credit. If you have any questions about your credit report, or wish to dispute an error, immediately contact the credit reporting agency that issued the report. Tip: You can get one free credit report per year from each of the three major credit reporting agencies simply by visiting www.AnnualCreditReport.com and requesting your free credit report. Unfortunately, you won’t find your credit score on your credit report. Some credit card providers have partnerships with one of the three large credit bureaus to provide free credit scores to their customers. Check to see if your credit card provider has such an arrangement.
- Pay your bills on time.This may seem like a no-brainer, but it’s important to make your payments on time, as any late or missed payments will likely be reported to the credit bureaus. If you’ve missed a payment, get your account current and stay current. The longer you go without missing a payment, the more your credit score should increase.
- Pay down your credit card balances.When your credit cards have high balances, it causes you to have a high debt-to-credit ratio (also known as utilization rate) and can be a sign to credit providers and lenders that you could be facing financial difficulty.Tip: Don’t move your balance from one credit card to another as this won’t help.
- Only apply for a new loan or credit card when you truly need one.When you apply for a new credit card a “hard inquiry” is added to your credit report, which will cause your credit score to drop slightly in the short term. You may also be adding more new debt than you can afford to repay, both of which could negatively impact your credit.
- Enroll in automatic payments.Enroll in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account. Most student loan providers offer an interest rate discount for automatic payments, so there is that added benefit as well. Tip: When setting up automatic payments on credit cards, if you choose to make only the minimum required payment, you could be rolling over large balances each month and get hit with high interest charges.
Having a clean credit report and a high credit score can help you in many ways, including lowering the cost of borrowing, obtaining insurance, setting up housing utilities, getting a job offer, and more. If you are having trouble making your payments, be sure to speak with your credit card provider or lender before you miss a payment. It’s in their best interest to work with you to find a mutually agreeable solution, so you may be able to work out an arrangement that meets your needs.