What is a credit score and how to improve it
In these times of economic uncertainty and global slowdown, a good credit score has never been more important. The ability to access loans, credit cards or even a mortgage is a topic that concerns more and more people, so having a good credit score makes the difference when it comes to having financial peace of mind.
Your credit score is a measure of your credit history. It is the number creditors use to determine the likelihood that you will pay a loan back on time. The higher your credit score, the more likely you will be approved for a loan, and that it will be at the best interest rates.
But, what factors determine the value of your credit score?
- Payment history: This is the most important factor, representing 35% of the credit score. It takes into account whether or not you have paid other creditors and bills on time. The more recent the late or missed payments, the greater the negative impact on your score.
- Percentage of credit usage: represents 30% of the score and takes into account how much credit you are using in relation to your total available credit. So, the closer you are to your limit, the higher the usage rate and the lower your score will be.
- Age of credit history: a good credit history for an extended period of time is a good sign to creditors. This factor, which represents 15% of the final score, considers the age of your oldest account, the age of your newest account, the average age of all your accounts and recent accounts opened. Having a long history of good credit will improve your score.
- Types of credit: managing different types of debt, such as credit cards, retail accounts, fixed term loans, accounts with financing companies and mortgage loans, is a plus when determining the value of your score. Although there is no exact science for the best formula, the combination of good management of these will improve your results. The types of credit you manage simultaneously represents 10% of the score.
- Credit checks: each time a creditor checks your credit report is recorded. This means that if you apply for a lot of loans, there will be a long record of credit checks. However, having a large number of checks can be an indicator that you are seeking a lot of credit and may be an indicator of credit risk. This affects 10% of your score.
If you want to improve your credit score, there are some things you can do, such as:
- Pay all your accounts on time.
- Keep the percentage of credit usage below 30%.
- Do not close your old accounts, since they are a way of demonstrating a long credit history.
- Diversify the types of loans you request.
- Check your credit only when necessary and avoid having a long record of credit checks.
You can get your credit score report for free once a year on some websites. Knowing the factors that determine it is the first step in improving your credit score and having access to loans with the best interest rates. Having solid credit is a way to save money in the long term and maintain financial stability.
At MAPFRE, we help give you a good financial education, keep you familiar with the most important concepts and enable you to understand the different types of financial products first-hand, so you always make informed decisions and choose the best options for your needs.