We all understand that credit scores is one of the biggest factors when it comes to securing loans, yet many still aren’t fully aware of how they work or what can be done to improve them. Your credit score has great influence on everything from interest rates and insurance premium, to home purchasing and being hired for certain jobs.

A high credit score isn’t dependent on high income. It’s all based on your payment history and the probability of you repaying the borrowed amount. Let’s explain a bit more for those that aren’t up to speed on how it works.

Understand how credit scores work

Make sure that you keep your credit history clean — paying your bank loans and your current debts on time helps. The credit agency collects all the information from creditors and creates a file on you and your payment history. With the person’s permission, lenders, insurers and employers can access the reports.

The reports that are given to them have a credit score, which is a numerical snapshot of your creditworthiness. One of the most widely used credit scores is the FICO score, and the range of it is from 300 to 850. “Scores above 750 and are known to be excellent, while less than 650 are known to be fair. The higher the score, the stronger your purchase and borrowing power,” says Jake Braun of ChopperExchange.

Check your credit reports

With so much riding on your credit history, it is very important to check your reports annually at the very least. You can do this for free as there are many websites that provide you with a free credit report. When you review your reports, make sure all of the information is correct. Any suspicious activity can be a sign of potential identity theft.

If you find an error on the report, you will want to dispute the information to get it removed from your reports. You will need to contact the lenders and creditors who have reported inaccurate information, asking them to prove the validity of the info or remove it at once. You can also request the credit bureaus validate any information.

“While it might seem like a hassle, staying up on your reports can help you avoid having to clean up a mess down the line. You can also sign up for credit monitoring, which will alert you of any key changes. It’s a little added peace of mind that is well worth the monthly fee,” explains Christopher VanDeCar, CEO of Optimally Organic.

Keep a track on your score

While you can access your credit reports from the three major bureaus once a year for free, it’s also a good idea to monitor your FICO scores at all times. When you get an alert that is suspicious it allows you to investigate right away. The sooner you can find errors, the faster you can get them resolved.

“The FICO score formula isn’t made public, so the best bet is to always pay your bills on time and keep your utilization as low as possible and under 20%. So, if you have a credit card with a $10,000 limit, you never want to carry more than a $2,000 balance on it,” advises Luqman Khan, Founder of Wireloo.

Pay your bills on time

One of the biggest influences your credit score is on time payments and closed accounts that have perfect payment history. 96% of people with excellent credit scores have never missed a payment.

“You need to know what creditors report to the credit bureaus and which ones do not. Traditionally, all credit card companies, mortgage companies and auto lenders report monthly. Utilities, like electric companies or phone companies, do not report your payment history to the credit agencies,” explains Darryl Howard of NuWays MD, a medical spa in Boca Raton. This isn’t to say you should ignore your responsibilities that don’t report to the bureaus. You should pay all of your monthly financial obligations on time.

By Bill Carmoday

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