Why Would I Need to Improve My Credit Score?
As more and more consumer-facing businesses are basing their financial decisions on credit scores, it is becoming exponentially more difficult to live a fulfilling life without any credit history or with a poor credit score. And this goes beyond getting a credit card or loan.
These days, you need a good credit score for everything from having a decent job to accommodation in a decent neighborhood. Your job, home, and car, as well as your children’s education most probably depend on your overall creditworthiness and your ability to pay your debts.
According to data gathered by Informa Research Services, an individual with a credit score in the 600 range – which doesn’t even classify as poor, but as fair – would need to pay $65,000 more on a $200,000, 30-year mortgage than an individual with a score over 750.
7 Good Reasons to Improve Your Score
Here are seven more good reasons why you need to improve your credit score:
1. Start Saving Money on Lower Interest Rates
Most credit card options for people with poor credit scores (including credit cards reporting credit) come with higher interest rates. Higher interest rates mean higher credit card expenses. The faster you improve your credit score, the faster your interest rate will drop.
2. Stop Paying Expensive Security Deposits
Moneylenders, landlords, and car salesmen are not the only ones who calculate your expenses using your credit score. Other service providers, like phone companies, for example, do it too. As long as your credit score is poor, you’ll be paying expensive security deposits.
3. Unlock Significantly Lower Insurance Rates
The same goes for your insurance, presuming you can get one in the first place. Whether it comes to home, life, or auto insurance, your overall creditworthiness matters. Improve it in time so that you don’t spend your entire savings for getting some peace of mind.
4. Access a Higher Credit Limit on Your Card
When it comes to credit card usage, the rule of thumb is never to carry a balance surpassing 30% of the total amount of your available credit. With a better credit score, you’ll have more available credit and therefore more leeway for carrying a credit card balance.
5. Wave Goodbye to Pushy Debt Collectors
Debt collector letters, emails, and phone calls range from pushy to straightforward harassing. The only way to stop them is by improving your credit score. By doing so, you’ll be able to unlock new financial benefits that can help you pay off debt collection accounts.
6. Call It Quits and Start Your Own Business
Having an above-average credit score allows you to get approved for a small business loan and start your own company. Similarly, buying a house is a huge investment in your family’s future. However, starting a business is not possible with a poor credit score.
7. Start Building Your Children’s Credit Score
The sooner you start acting responsibly with your credit, the sooner you’ll be able to start building a future for your children – get them to better schools, support them financially, and help them get on their feet once they are adults. Any other alternative is unacceptable.
How Credit Cards Reporting Credit Affects Your Credit Score
Just having or not having a credit card affects your credit score.
Roughly one-third of your credit score, as calculated by either scale, is based on your credit usage – a gauge of how much available credit you have in comparison to how much you actually use. Credit usage essentially boils down to the responsible use of credit cards.
Here’s an example:
If you own 2 credit cards, each being limited to $2,000, the total amount of your available credit is $4,000. If the total of balance you are carrying on your credit cards amounts to $1,200 or less, your credit score, along with your credit usage, should be satisfactory.
How Credit Card Balance Is Accrued
Credit card balance is the total amount of money you owe to your credit card issuer – the money you borrowed and spent plus additional expenses and fees. Balance is accrued every time you pay only the minimum amount of debt as shown on your billing statement.
That is what carrying a balance means – moving debt to the next billing cycle.
What Else Counts as “Responsible Credit Card Behavior”?
For any type of credit card, credit reporting cards included, “responsible behavior” boils down to one simple rule – paying your credit card billing statement in full and on time. Everything else is supposed to help you reach that monthly goal through responsible everyday use:
- Understand your credit card terms – especially your interest rate and additional fees.
- Limit how many cards you own – the more billing statements, the bigger the confusion.
- Never lend your credit card to someone else – you’ll risk losing control of their spending.
- Avoid getting cash advances – cash advance fees come with ATM fees and high interest.
- Avoid unnecessary balance transfers – unless you have favorable balance transfer terms.
- Finally, charge only what you can afford – never borrow more than you can payback.
How Does Having a Credit Reporting Card Impacts Your Credit Score?
Your credit score gets calculated with a slight delay. Because it generally takes time for credit bureaus to obtain consumer and cardholder data, you can hardly expect your credit score to be calculated in real-time. This becomes a problem if you need to boost your score fast.
Credit reporting cards differ from other similar payment methods in that they report your credit card behavior directly to the credit bureaus. This is why they are so convenient for people with poor credit scores and no credit history in the first place – they help push things forward, faster.
Are There Any Alternatives to Credit Cards Reporting Credit?
Yes and no.
While there are several other ways for you to build and improve your credit score, only this one includes having your own credit card that won’t burn your pocket or put an additional strain on your credit score. Also, only credit reporting cards report to bureaus regularly.
If you want to boost your credit by using a credit card, this feature is crucial.
Other alternatives to credit reporting cards include:
- Paying down high credit card balances within 30 days.
- Establishing the practice of tracking your credit score.
- Start paying your bills in full and on time for at least one year.
- Having rent and utilities report your payment history.
- Getting a student credit card, if applicable to your situation.
- Becoming an authorized user of someone else’s credit card.
- Taking a “credit builder loan”, presuming you can pay it back.
- Getting a loan with a cosigner, presuming you can pay it off.
