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How would you feel if your loan application gets rejected when you need it the most?

Despite the increasing number of people using credit cards and applying for cash loans, only a handful knows that credit scores exist.

In fact, Liz Weston, author of the book “Your Credit Score,” shared that while some people have an idea on what is a credit score, many still do not know how it works and how pervasive credit scoring is in their financial lives.

To understand how credit score works, you must first understand that credit bureaus keep records of your credit history. All of your previous loans and credit card bills are recorded including notes if you have paid on time or defaulted. In some countries, even phone and utility bills are also recorded.

Once you apply for a loan or a credit card, banks and other financing institutions will ask the credit bureau for your credit history. Upon checking your payment behavior or creditworthiness, they will then give you a credit score which can range from 300 to 850.

Scores higher than 800 is excellent. A credit score of 670 up to 800 is considered good to very good. Scores between 580 and 669 are fair while lower than 580 is poor.

Individuals with a poor credit score usually get declined when applying for a mortgage, car loans, cash loans, and even credit cards.

It’s heartbreaking when you finally decide to buy your dream house but your mortgage got declined because of a low credit score. How can you build a healthy credit score?

Pay on Time

According to NerdWallet’s survey, 11% believed that everyone starts with a perfect credit score. Contrary to this belief, people start as a credit ghost. Their score is non-existent since they have no credit history to start with.

To start accumulating points, you need to get a loan from a licensed money lender. Licensed lenders provide loans to people who have no credit history yet. Understandably, you will first be approved to a lower loan amount. But if you always pay on time, you will start making positive credit history and your loan amount will increase.

Licensed cash lenders are mandated by law to report your loan and payment details to the credit bureau. Loans you acquire through loan sharks and illegal lenders will not be recorded. It will not help you build a credit score. This is why you need to make sure that your cash mart money lender is licensed. Moreover, do not forget to read some reviews to find best-licensed moneylenders.

Another way to start building a credit score is to apply for a credit card for beginners and settle the bill every due date. Unfortunately, there will be a lot of requirements that you need to submit. And if you are easily tempted to go on a shopping spree, a credit card is riskier for you.

Limit new credit applications

When you apply for a new credit card or loan, the financing company will check your credit history from the credit bureau. This is called a “hard” inquiry. If you made multiple credit card or loan application to various banks and lenders, it will greatly pull your hard-earned credit score. Add to that, the financing companies will also see that you have been desperately applying to other companies. You’ll get declined due to overexposure.

Fortunately, if you make multiple application within 15 days, they will all be considered as a single “hard” inquiry.

Credit utilization

More than 2 in 5 Americans think that carrying a small balance in their credit card bill helps their credit score. This is because credit utilization can make a huge impact on your credit score. It is unfortunate that credit utilization is misunderstood.

The truth is, the small balance in your credit card has no direct impact on your credit score. But it has an indirect impact which you will eventually feel after a couple of months.

Credit cards charge interest on your unpaid balance. It may be small for now, but it will grow over time. The more it increases the more financial burden you have to pay.

So what credit utilization actually means is to use part of your combined limit. Using between 1% and 30% of your credit limit is ideal. Pay your bill on time, and then use between 1% and 30% or the card. Simply keep your credit card active but avoid the temptation of not settling the bill. This is a dangerous myth.

Have a mix of various credit type

Having different credit or loan types has a minor impact on your credit score, but nevertheless, it can still add more positive scores. It can also reflect that you can successfully handle different types of loans. The banks and lenders can also see how you can handle your financial responsibilities. A good mix of credit is a credit card, a personal loan, and a mortgage.

Length of credit history

Your credit history starts from your first loan or credit card. It also considers the average age of your credit cards. If you still have your first credit card, do not close its account unless you have a strong reason behind it.

Having a good credit score can help you get easily get approved for your needed loans, especially in times of emergencies.

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