The credit scoring system has been used by many businesses to determine a borrower’s level of risk. Insurance companies and financial institutions use your credit score to determine whether to give you a credit card, loan or mortgage. They look at factors such as your collection accounts, whether you pay your bills on time or if you have any outstanding debts. Using a statistical program, they compare the information obtained to that of previous customers with a similar history. Each factor is awarded a specific point and then a total is done to determine your credit score.
Your Credit Report
It is your federal right to obtain a copy of your credit report once every 12 months in order to determine if the information provided is accurate. Financial institutions may charge a fee to issue credit scores. They often provide their customers with information on how to improve their score. It’s also important to note that companies may use different scoring models. Characteristics such as sex, race, marital status and religion may not be used as factors in some scoring models. But the law allows the model to use age.
How to Improve Your Credit Score
Changing several factors that influence your credit score can significantly improve it. But it depends on the model used by a business to evaluate your application. You need to understand the factors that have been used by a creditor or insurance company to determine your credit score in order to know how to improve it. In fact, most of these businesses will advise their customers on ways to improve their score by taking into account the credit scoring model they have used.
Some of the ways to improve your credit score include:
- Many credit scoring models consider the number and types of credit accounts you have to determine your score. Having too many credit accounts may just undermine your credit rating.
- Your credit track record is also likely to be a big issue in your report. If you have an insufficient credit history then you might score negative. You may want to make timely payments and avoid balances in order to change this.
- Avoid owing an amount that is so close to your credit limit. This can have a negative impact on your credit rating. Companies use the amount of debt you owe as a factor to evaluate your score.
- Almost all credit scoring models will check if you have been paying your bills on time to determine your credit score. If you have multiple reports that indicate you’ve paid bills late or declared bankrupt, it is likely to have a negative impact on your score.
It’s going to take a while before you can see any significant improvement in your score. Simply focus on paying your bills on time and settling outstanding balances while staying away from new debts, otherwise you may be limited to bad credit business loans.