Credit rating. How to properly use a credit card to improve your credit score? If you close the loan, the rating rises

07.05.2022

With bad credit, you may have difficulty getting things like loans, credit cards, and store cards. It can also negatively affect your chances of getting a mortgage on your dream home. There are many ways to improve your credit score and the best place to start is with this article!

Steps

homework

Get a credit card if you don't already have one. If you don't have a credit card and have never secured a loan, your credit score will be 0 (but in a good way). Because credit card companies and lending institutions don't have the information they can use to make an assessment of your credit score. You are like a dark horse to them. You can turn out to be both a trustworthy borrower and not so much.

Get a free copy of your credit report online. There are many websites where you can get it. You are also entitled to one free report per year. Make the most of this opportunity! Just search for the three major credit rating agencies (TransUnion, Experian, Equifax) using any search engine and you will find tons of places and ways where and how to get your hands on your credit report.

Take a good look at your credit report for obvious errors. Even small mistakes can have a big impact on your credit score. Therefore, if you find inconsistencies, take immediate action to eliminate them.

Find records of small credit and collection agencies in the report and contact them. Ask them to provide evidence that the overdue payments belong to you and go through the details you specified. There is a chance that small companies will not be able to provide you with such information and you will have the opportunity to ask them to remove this data from your report. This will improve your credit score immediately.
The same applies to companies merged with other companies or liquidated companies. If the information you requested cannot be provided for one reason or another, you can request that the relevant entries be removed from the report and thereby improve your credit status almost instantly.

Get a reasonable loan if you know for sure that you can repay it. About 10% of your rating is the so-called "account cocktail". In other words, the number of available loans and credit accounts. If you take out a small loan and pay it off quickly, you can improve your credit score.
- However, if it takes you several months and/or years to pay off, don't take it on. Interest rates can eat into your cash and make it harder to pay off your principal. Take out a loan only if you are 100% sure that you can repay it.
Start using your old credit cards again. If you have credit cards that you no longer use, the lender may simply decide to stop reporting the status of the account to the credit bureaus. It's not that bad until you realize that longer-term accounts actually improve your credit score. So take out your old credit card, make small recurring payments, or use it occasionally to buy movie tickets. Pay off your debt in full each month.

In order to determine the likelihood of the borrower repaying the debt and to protect itself from losses, the bank, before entering into a loan agreement with a client, carefully analyzes its solvency. The best tool for determining the reliability and economic stability of a borrower can be a credit rating (CR).

Check out two examples of a credit score report:

How rating works

To calculate the CR, a so-called scoring model is created. On its basis, points are assigned to the borrower.

The overall score depends on the following indicators:

frequency of payments (35% of all scores) - if debts are repaid on time, the score can be very high. With frequent delays, the bank may even refuse the borrower;
loan term for previous loans (15%) - it is desirable that loans are repaid evenly and for a long time. Early repayment of debt is not welcomed by banks;
outstanding current debts (30%) - after the end of all payments, the borrower must have at least one second of his income. Outstanding loans force the bank to refuse services to the borrower or reduce the loan amount;
type of loan (10%) - preference is given to long-term;
frequency of applying to financial institutions (10%) - if there are many applications for loans in the credit history (CI) of the borrower, this will cause a negative attitude of the lender towards him.

Calculation rules

By adding up the corresponding percentage data, they get an overall rating that allows you to correlate the financial reliability of the borrower with a high (100-65%), medium (64-35%) or low (34-0%) rating. It depends on how a financial institution will meet you when applying for a loan.
The higher your rating, the more likely that the bank will provide you with a large loan at a lower interest rate and even on preferential terms: without guarantee, without collateral, based on financial flows.
If you have a bad credit history, a financial institution may refuse to issue you a loan or provide it on harsh terms (high interest, short repayment period, smaller amount, etc.).

How to find out your rating

You can get acquainted with your CD online through specialized services. As a rule, the price for this service is about 300 rubles. Note that, unlike a credit history, when requesting a rating, you do not need to confirm your identity, agree to data processing, but you just need to indicate your full name, series and passport number .

Why does the borrower need it?

Each borrower has the right to know his CR in order to:

identify errors in the CI made by the bank, as this may cause him to be denied a loan;
do not become a victim of scammers. It is interesting to know that it is often possible to obtain a loan in the name of its owner using a copy of a passport, although he himself may not be aware of this;
understand the reasons for refusal to obtain a loan;
when traveling abroad, know everything about their outstanding debts;
find out about a negative balance on a debit card that is not known to you, but reflected in your credit history.

Is it possible to increase your CR

To improve your CI, respectively, to increase your credit rating, you need to:

pay arrears, if any;
minimize simultaneously open contracts;
use small short-term loans more often and make timely payments on them;
check your CI to avoid various mistakes and typos in it.

It is useful to know that at the present time the scope of the CR has expanded: it has also been used to determine the new amount of insurance premiums, rental deposits, and even the quality of candidates accepted for any position.

Having applied for a loan and received a refusal, most people do not even try to find out the reason for the negative decision of the bank. As a rule, bank employees do not give any explanations. The future borrower solves the problem in a standard way - he goes to another institution in the hope of getting what he wants. And not always his desire can come true.

To be sure of the return of their funds, the bank carefully examines customers

And the reason for the refusal is that the applicant has a low credit rating. What this indicator is, how it is formed, and all the ways to increase it, we will consider below.

This is the main indicator of the quality of the borrower's credit history and determines its creditworthiness. When submitting an application, each applicant is assigned an appropriate scoring score in the form of a three-digit number. According to it, the bank judges the real possibility of the client to repay the loan taken and, on its basis, makes a decision on issuing a loan. It can also affect the interest rate.

There are 5 factors that determine the level of credit rating. Their impact on the borrower's assessment is expressed as a percentage.

Information on compliance with the payment schedule (35%).This is a key indicator for the lender, as it demonstrates the financial discipline of the client. You cannot hope for a high score if there have been past due payments or even going to court to collect debts in the past.
The amount of existing debts on loans taken (30%).If the debt burden "eats" half of the income, the risk of non-payment increases dramatically. The client becomes “not interested” in the bank.
Duration of credit history (15%). A long period of use of borrowed funds indicates reliability, but only under one condition - conscientious repayment without delay.
Number of simultaneously open loans (10%). Frequent application to the bank for a loan indicates the financial instability of the client.
Types of loans taken (10%). This indicator is affected by the "seriousness" of the loan. The best option is a mortgage. To obtain it, a very thorough scoring is carried out. Long-term use of credit cards with an increase in the limit also indicates a good solvency of the borrower.

How to increase your score

Based on the above, there are ways to increase the key indicator. Here are some recommendations:

Try to check your credit history and eliminate all errors and errors in it. Because of them, the client may be refused, and constant failures will immediately affect the quality of the story.
Make payments on time, demonstrate your conscientiousness in fulfilling your financial obligations.
If you are a co-borrower, then take an interest in the credit history of your loan partner. His low rating will automatically lower yours.
In order not to apply often and not get a possible rejection, it is better to check your chances with a loan calculator. Now many banks provide this tool on their websites. The calculation will allow you to realistically assess the conditions of the future loan and the amount of monthly payments.
Close unused credit cards. Their large number speaks of constant financial difficulties. It is better to leave those that you have been using for a long time.
Apply for a loan to the bank only in case of serious need.

These characteristics should be monitored from the outset.

Recently, the range of application of such an assessment has expanded. It is used not only to decide on the issuance of borrowed funds: it is required to establish the amount of insurance premiums, for collateral for rent. Some employers have begun to pay attention to it when hiring new employees.

What do you think your cell phone tariff has in common with an apartment rental agreement? Many find it difficult to answer this question. But the truth is on the surface - both require that you have a decently high credit score, that you can be trusted to rent an apartment or use a phone plan without fear that you will violate a payment agreement. The higher your credit score, the better your chances of getting approved.

It's no secret that higher credit scores can translate into perks like better interest and insurance rates. But practically speaking, we often do not think about it. Getting a loan on favorable terms requires some work.

Whether you're new to lending or trying to get a second loan, these tips will help you use a credit card to improve your credit score.

Choose the right credit card and stick with it

Your credit score tells potential lenders how good your ability to manage your own debt is. If you've never had a credit card, lenders won't know anything about you, so you won't have credit scores.

Luckily, guaranteed or secured credit cards are specifically designed for those who want to build or rebuild a credit history. Do your homework and choose the card that best suits your needs. While the rewards and additional "benefits" for these types of credit cards may not be as impressive as they are for world-class cards, this step is a good starting point for building your credit history.

Once you receive a credit card, stick to the terms of payment and treat the terms of use responsibly. Frequent applications for new credit cards can lower your credit score - lenders may think that you are looking for more and more new loans.

Pay your credit card obligations on time

The most important thing you can do with your credit card to improve your credit score is to make your required payments on time. This will show potential lenders that they are not at risk of losing money.

35% of your credit score is calculated based on your payment history; the more often you pay on time, the higher your rating. In addition, to increase credit scores, making payments in full is of no small importance.

Keep your credit balance low

The next 30% of your credit score is calculated based on your credit utilization rate. The ratio compares the amount you've already spent on your credit card with your total credit limit. Effective use of credit requires that you keep your credit card balance at least 30% of your total limit. For example, let's say you have two credit cards with a combined limit of $5,000. Keeping your balance at $1,500 (5,000 x 30%) will help boost your credit score.

It is important to note that depending on the random time of the month your credit score is calculated, you may have a high usage rate even if you pay your bill in full. Keep an eye on your credit usage: if it approaches 30%, pay now to keep your ratio low - this will help improve your credit score.

Keep Your Credit Accounts Open

Lenders always want to be sure of your ability to use credit responsibly and will watch how long you borrow. This credit history will bring you up to 15% credit score.

Opening and closing credit cards for promotional offers and signup bonuses can hurt your credit score. If you need to close a card, remember that it can reduce the time lenders think you have credit. The longer your accounts are open, the better your credit score will be.

How can I improve my credit score?

Credit cards, when used strategically, can greatly improve your credit score.
To improve your credit score with a credit card:

Find a guaranteed or secured credit card and use it.
Make required payments on time. If possible, pay off your debt in full.
If necessary, use your credit no more than 30% of the limit with payment in the middle of the month.
Keep your old account open.

Building or rebuilding your credit history can seem like a daunting task. But when used properly and responsibly, credit cards can be used as a tool to acquire the new benefits that come with a good credit score. Be careful with credit cards about overspending - misuse will lower your credit score and lead to costly late payments and interest.