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5 Simple Ways to Improve Your Credit Score and Get Out Of Debt

Getting out of debt and raising your credit score may sound like the same thing. It gets difficult to draw a clear distinction as both involve paying off what you owe. The truth is, even though one does complement the other, they’re both very different at a fundamental level. Let’s look into it.

Reducing Debt Vs Increasing Credit Score

Debt is simply the money you owe in the form of loans (money borrowed) at a particular point in time. A credit score is your eligibility to get a good loan or credit card at low-interest rates. You may think that if you get out of debt, it should directly translate into improved credit scores. Well, that’s not the case.

Credit scores are generated based on a comprehensive evaluation of all your past repayments, bad loans, interest rates, credit utilisation rate, and amount owed. It’s more like a track record of your money management skills rather than just a result of a few good actions.

So the amount owed is just a small factor in the credit scoring process. The debt repayment will only be relevant to your credit score until a certain point of time. After that, the score will just be a reflection of your entire credit history with no special thanks to that one debt you paid off.

Fortunately, you can formalise a plan and build your credit score one step at a time. The following list shows you different angles as to how your actions affect your credit score and what you can do to improve it.

So, without further ado, let us look at 5 simple methods to improve your credit score.

Regular Monitoring

The first thing you need is to get up to speed on what’s going in your credit reports. You can visit the website of any of the top credit bureaus in the UK, like Experian, Equifax, or TransUnion, and request a report at a nominal fee after filling in your details. You can also visit their partner sites for free reports.

This helps you with the following:

Staying Updated:

Credit scores frequently change as every lender submits a chunk of information as soon as they are done conducting business with you. This influences your current credit score.

Preventing Frauds:

Any fraudster can use a false name like yours to get a loan and not be held accountable for it. This sabotages your credit score as your identity is wrongly used. Keeping tabs on your credit report helps you alert the proper authorities before it’s too late.

Eliminating Errors:

Credit reports from various credit bureaus may not reflect your actual financial and risk status. It is imperative to analyse the credit reports and get rid of any errors so that the final score comes out to be accurate.

Avoiding Bad Associations

Sometimes, keeping financial associations with people having a poor credit history can take a toll on your credit score as well. Here are some people who can affect your credit scores:

Business Partners:

If any person who has done business with you in the past or is currently a partner, has poor credit scores, it can affect your credit scores as their finances are mutually tied up with yours.

Family And Friends:

People who bear a joint account with you can cause damage to your credit scores if their credit risk is below satisfactory levels. It’s best to break off any financial association with your peers to avoid having your credit score explained.

Developing A Few Good Habits

Developing good financial habits can work like a charm in building your credit score. Here are a few habits worth trying out:

Making Timely Payments:

Prioritise on setting aside money exclusively for loan payments. This allows you to make timely payments without making last-minute compromises in your lifestyles.

Spacing Out Loan Applications:

Instead of applying for loans whenever there is a need, it would be advantageous to anticipate major loan requirements and space out your applications. This reflects positively on your scores and also helps in planning your finances well.

Not Moving Houses Very Frequently:

Changing houses frequently is a red flag for most lenders, as it implies that you are unable to stay committed to one place and the financial responsibilities involved with it. It’s kind of like your employment history where recruiters get spooked if you have a lot of stints on your resume.

Keeping A Low Credit Utilisation Rate

The credit utilisation rate is the ratio between all your outstanding credit card balances combined, to the total credit limit you have. For example; if your credit limit is 1000 and balance is 300, your utilisation rate is 30%

The credit utilisation rate is a significant factor in the credit reporting process. It is said to have at least a 30% say in your final credit score. Here is how you can lower it:

Keep All Credit Card Accounts Open:

Even when you’re done paying your outstanding balances for a particular credit card, you should not close that account. Credit cards with no outstanding balance will help in driving down the utilisation rate.

Go For Higher Limit Cards:

Getting high limit cards can skew the ratio in your favour and lower your overall utilisation rate.

Follow A Bi-Monthly Payment Cycle:

Paying credit card dues every 15 days will attract lower interest rates, as well as keep the utilisation ratio in check.

Using Boost Methods

If you feel like expediting the credit improving process even further, you can boost your scores by bringing in more factors, such as:

Using A Prepaid Credit Card:

Prepaid credit cards are pre-loaded cards that you can use for a minimal monthly fee. As the card is prepaid, the only payment you need to worry about is the monthly fee. This way, you are increasing the number of timely payments and boosting your credit score.

Using Experian Boost:

The credit reporting bureau Experian offers a new tool called Experian boost, using which you can allow Experian to monitor all your utility payments like phone bills and electricity bills. This way, every time you make a utility payment, it gets factored in your report and boosts your credit score.

Conclusion

Paying off debts should be a priority as it will reflect on your credit score in the future. But if you want a good credit score and improve your chances of getting loans at low rates, you need to align your lifestyle. Following the categorised list above can help you build a quality credit score.

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