Moneyadviceblog » Credit Scoretitle_li=Loans » How Does Credit Work?

More and more youngsters are thinking about buying a home, a brand new car, or investing in a business, and that’s where credit gains its importance. Not only is it important, but it is also important for you to know what it takes and how it works. What is ‘creditworthiness’?

You will want to keep high most of the time because it will allow you to take credit, and some employers even take your credit score to see if you are eligible for work. Now that I am done underlining its importance, I will teach you how it works…

Credit Score

How Does Credit Work?

How Does Credit Work?

A credit story is a basic part of your credit score, and your score is calculated according to your credit history.

Your credit history will contain all the credit cards and loans that you have ever taken, from the first to the last. It summarizes how well you manage to pay your credits, giving lenders an overview of how you will be paying your loans in the future.

So, how exactly does credit function in terms of credit scores?

Equifax, Transunion, and Experian are the three major credit bureaus in the United States. The purpose of a credit bureau is to collect credit information from various sources, compile it, and assign a credit score based on the information they have collected.

You’re given a credit score, which ranges from 300 to 900 points and indicates how well you’ve managed your credit cards and loans in the past.

Good Credit Score 

Normally, a good credit score is 720 or higher. If you have a credit score of 720 and above, most of your requests will get accepted with the best interest rate. So how do you do to get these 720 points credit scores? Pay your bills on time.

It allows lenders to see that you are a trustworthy borrower; this is also known as having creditworthiness. If you’re behind on any payments, make every effort to catch up as quickly as possible. Contact your creditors to arrange up payment plans and new payment dates.

It’s also a good idea to set yourself reminders for all of your bills, so you don’t forget to pay them in the future. Make a budget for all of your recurring payments. Consider automating your payments as well.

Ways To Improve Your Credit Score

Do not worry if you haven’t had the best score; you can change that. A credit score is not something static, it is very dynamic, and you can change it (whether it is for better or for worse). To enhance your credit score, you must first understand your present credit situation. So, how do you know what your credit score is? When was the last time you had a look at your credit report? Is the information on your credit report complete and accurate? Do you make on-time payments on all of your bills? Are you aware of any misdemeanors?

How Does Credit Work?

How Does Credit Work?

Check your credit score.

At any moment in time, you should be able to answer all of these questions concerning your credit. This will give you an excellent sense of your credit score before applying for any loans. Knowing your credit score and credit history will also alert you to the possibility of credit fraud or identity theft.

Make timely payments on your invoices and debts.

This is necessary, as noted in point 3 above, and if you are unable to do so, contact your creditors as soon as possible to discuss your alternative payment choices.

Reduce your debt-to-credit ratio overall.

This can be accomplished by paying down debts and/or paying them off every month. Your credit score is affected by your overall debt burden as well as your percentage of credit utilization.

Let’s say you have a $1,000 credit card with a $950 balance; your credit card use is 95%. Creditors consider high utilization as a metric to determine how likely you are to repay what you owe. Therefore it can work against you.

Having a good credit score is very important and beneficial for you; read part two of this article to know more in-depth details about credit score. Let us know in the comments what you think about taking loans.