People typically apply for loans or credit from banks or lending companies for major purchases. This method offers financial convenience and flexibility as you pay these institutions in installments instead of a lump sum.
However, qualifying for these loans is more complicated than just asking for one. You first must pass a credit investigation from relevant organizations, which will review your financial history and information to ensure you qualify for the loan. Their rating determines if they’ll approve your loan application and the interest rate they’ll charge.
There are many ways to increase this rating—the credit score—and starting early can help immensely. This article explains what a credit score is and how to build yours up.
What is a Credit Score?
A credit score is a numerical value that reflects how likely you are to repay a loan on time. The credit bureau determines your score based on your credit history, and then lending institutions use that calculation to assess the risk of granting you a loan.
The government-controlled Credit Information Corporation (CIC) can issue a credit score from 300 to 850.
Factors That Affect Your Credit Score
The CIC calculates your credit score based on five primary criteria.
1. Credit payment history
This factor considers how regularly you pay debts, in what amounts, and whether the payments are on time. Being consistent with your repayments can help inform lenders that you are trustworthy and capable of handling a new loan.
2. Amount owed
This amount is what you owe to lending firms and is part of how much of your credit limit you spend on average. Having many loans and maxing out your credit cards can indicate unreliability or overdependence on borrowing.
3. Length of credit history
Your credit cards and loan accounts’ ages are essential indicators for the CIC. A longer credit history may indicate a greater level of experience in managing credit and a lower risk of default, which is why starting sooner is essential.
4. New credit
Opening too many new credit accounts in succession can negatively affect your credit score, which signals you may be a risky borrower. It’s best to keep your loans few and focus on managing them well.
5. Credit mix
Your credit mix is the different kinds of credit you have. For example, updating your collateral loans, auto loans, personal loans, and business loans can inform the CIC that you can manage your credit. Then again, too many loans can hurt your score, too, so it’s good to find a balance.
What Makes a Good Credit Score in the Philippines?
Again, your credit score will range from 300 to 850, with a higher score denoting a more creditworthy borrower.
The ranges have the following ratings:
|650–749||Good to Very Good|
|550–649||Average to Fair|
|549 and below||Poor|
Depending on the loaning body, a higher score means an easier time getting loans or credit cards approved, higher loan amounts with lower interest rates, and lower overall costs.
How to Build or Improve Your Credit Score
You might wonder how to improve or increase credit scores. Here are five tips for setting you on the road to an excellent credit score!
1. Maintain good spending habits
When you get your first credit card, it might be tempting to go on a shopping spree and purchase all the things you couldn’t previously afford. However, good credit relies on your history, so it’s best to establish good credit habits early on. Use your card responsibly to let the CIC know you can handle it.
It’s advisable to limit your spending to 30% or less of your available credit and stick to that range as closely as possible. This tip applies even with future loans and cards because it takes time to develop a habit, including responsible credit management.
2. Always pay on time
As much as possible, you should pay your bills, credit cards, and loans on the due date or earlier. Your credit score can take a big hit from one late payment or, worse, a total default. Plus, you must pay more due to late fees.
Overborrowing on your credit card can make it much harder to pay on time and lower your credit score, too. So, borrow responsibly to make timely payments.
3. Don’t apply for too much new credit
Each time you apply for credit, it can hurt your score. Try to apply for a new credit line only after a sufficient grace period because you don’t want the CIC to consider you as someone who relies too much on loans.
4. Check your credit report
You can get your credit report through the CIC affiliate: Credit Information Bureau Inc. (CIBI). Make sure to carefully review the transactions, dispute any mistakes, or report any identity theft attempts.
5. Be patient
Keep going with your credit score efforts even if you don’t see improvement immediately. Consistently pay your bills on time and use your credit wisely. Over time, your score will improve.
A Good Score for a Good Future
If you’re interested in getting a loan, it’s essential to review your credit score and consider the many ways you can improve it. A good credit score can make the difference in purchasing a new home, starting your business, or getting your dream car. That’s why keeping your score in mind is vital when making critical financial decisions.
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