The Finance World Magazine| Edition: April 2023

when applying for a loan to purchase a
car or a house. Lenders take into account
your credit score and payment history,
and if they are satisfactory, you may
qualify for a lower interest rate, which
means you would pay less over the
course of the loan. On the other hand, a
poor credit score or unreliable payment
history could lead to higher interest rates
and less favourable financing options.
Your credit history could also impact
your ability to get approved for a rental
application. Some landlords or rental
companies may review your credit report
to assess your likelihood of paying rent
on time.
In addition, when seeking employment,
your credit report may be examined by
potential employers, particularly for roles
involving finances or management. This
is because employers want to ensure that
you are responsible with money.
What are the factors that affect your
credit score?
The first factor that affects your credit
score is payment history, which makes
up 35% of the total score. It determines
whether you pay your bills on time or
not. Late payments negatively impact
your score, and the later you pay, the
more it affects your score. If you’ve had
issues like bankruptcy, foreclosure, or
collections, other lenders may see this
as a warning sign and may be less likely
to lend to you.
The second factor is debt, which
accounts for 30% of your score. Even if
you pay your bills on time, having too
much debt compared to your credit limit
can harm your score. If you’ve reached
your credit limit but have a balance of $0,
this can still negatively affect your score.
Credit history is the third factor,
making up 15% of your score. This factor
considers how long you’ve been using
credit; a longer credit history with active
accounts improves your score. However,
having a short credit history with ontime
payments can still be favourable
for your score.
New credit accounts for 10% of your
score. Applying for several accounts
within a short period can hurt your score
temporarily, as lenders may check your
credit information, leading to a slight
decline in your score. Lastly, the types of
credit you use make up the final 10% of
your score; having a variety of accounts
like credit cards, store accounts, and
mortgages can be beneficial to your score.
What should you do when you have
a bad credit score?
It takes time to increase your credit
score, but the payoff in the long run is
worth it. To start improving your score
today, you can take certain actions,
although it’s recommended to allow
3 to 6 months before making a major
purchase. Here are some suggestions
that may aid in boosting and maintaining
a good credit score:
• Examining your credit report for
errors: Any inaccuracies, such as
a reported late payment that never
occurred, can result in a significant
reduction in your score.
• Paying your bills on time: It is one of
the most effective ways to enhance your
credit score. You may make it simple
for yourself by setting up payment
reminders or enrolling in automatic
drafts through your bank or lender.
• Reducing your debt: It is another
essential step in improving your score.
Start by paying off your highest balances
first, and if feasible, pay more than
the minimum payment. Stop using
high-interest credit cards, if possible.
• Avoid new credit card purchases
or card applications: Keeping your
balances low will help improve your
credit utilization ratio, which can have
a negative influence on your score.
Don’t cancel any loan accounts or credit
cards because credit age contributes
to your score.
• Seek credit counselling if necessary:
If you require assistance, various
agencies are available to help you.
With a positive
credit score and a
consistent payment
history, you could
be eligible for a
reduced interest
rate and save a
significant amount
of money in the
long run!
What the risks of using credit?
Making impulsive use of credit can harm
your credit score, making it harder for
you to qualify for credit in the future or
leading to higher interest rates on loans.
It’s also easier to spend more than you
can afford with readily available credit,
which may result in larger debt payments
that could be challenging to manage.
However, by paying your bills on time,
maintaining low account balances, and
using credit sensibly, you increase your
likelihood of obtaining a loan with a
competitive interest rate, but if your
credit score requires enhancement, it’s
advisable to allow sufficient time before
applying for a loan to allow for any
modifications to take effect.
April 2023 www.thefinanceworld.com 9