Managing credit: Understanding your credit score and how to improve it

Your credit score, which consists of three digits and measures your creditworthiness, is very crucial in determining your financial future. Your credit score is used by lenders, landlords, and insurance companies to assess your capacity for debt repayment and money management. Therefore, for successful credit management, understanding your credit score and how to improve it are crucial.

Understanding your credit score:

Your credit score is a number between 300 and 850 that is determined by the details in your credit report. Equifax, Experian, and TransUnion are the three main credit agencies that gather and maintain data on your credit history, including your credit accounts, payment history, and any outstanding debts.

The FICO score, which is used by 90 per cent of reputable lenders, is the most widely used credit score model. Five variables contribute to the FICO score: payment history, credit utilisation, length of credit history, credit mix, and new credit. Your credit score is based on several factors, including payment history (35 per cent of your score), credit mix (10 per cent), credit utilisation (30 per cent), length of credit history (15 per cent), and new credit (10 per cent).

Checking your credit Score:

It's crucial to routinely check your credit score to ensure that the information on your credit report is accurate and current. From each of the three major credit bureaus, you are entitled to a free credit report once every year. A few websites and applications also let you check your credit score for free, but some may charge you.

Improving your credit score:

There are various actions you can take to improve your credit score if it is not where you want it to be:

Be sure to pay your bills on time because missed payments can seriously harm your credit rating. Pay attention to making timely payments on all of your bills, including utility bills, credit card bills, and loan repayments.

Reduce your credit card debt; carrying a large balance on your cards can lower your credit score. Maintain a credit usage ratio of less than 30 per cent while making as much progress as you can on your credit card debt.

Reduce the number of new credit applications you make because each one results in a hard inquiry that could affect your credit score. Only apply for credit when you truly need it, and try to keep your credit application volume under control.

Read more | Explained: Advance salary loan vs personal loan; understanding key differences