No matter if you’re new to personal finance or you’re a savvy, in this post I’m going to explain what credit score is and how you can build the perfect credit score.
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What is “Credit Score”?
As the word says, the credit score is a score that tells people, in particular, lenders and financial institutions where you can borrow money from, how good you are with money. Therefore how likely you are to pay back your debt.
If you borrow money (also referred to as opening a line of credit) and struggle to pay back, this will impact negatively on your credit score.
On the contrary, if you’re good in paying back the debt, this will impact positively on your credit score.
Is it important to have a good credit score?
In simple words, YES.
Even if you’re not planning to borrow money or to ask for a mortgage right now, is it something you might want to consider in future.
Think about, maybe in 5 or 10 years time you want to be a homeowner, so you might want to ask for a mortgage. The earlier you start to build your credit, the more likely is your application to be accepted when the time will come.
And if you have a good credit score you can get a lower interest rate rather than someone with a not that good credit score. Which is going to impact on the total amount of money you have to pay back.
So it’s definitely going to pay back, in all sense, start to build a good credit score.
How to build a perfect credit score
Anyone can build a perfect credit score, even if you have never borrowed money before. As long as you are 18 years old or older.
- Start borrowing money – May sound weird, but the best way to building a credit score is to borrow money. One of the easiest ways is to get a credit card and use it wisely.
- Pay in full your balance – When you’ll use your credit card, at the end of the month you’ll receive a balance to pay back. Remember to pay ON TIME and IN FULL if you want to build a perfect credit score!
- Borrow less money than what you’ve got available – When the application for a credit card is granted, you’ll receive a certain amount of credit you can use every month. Try to use as little as you can. In this way, you’ll show you actually need less money than what you’ve been allowed to. Your credit score will thank you.
- Pay off previous debts – if you have outstanding debts, pay them back as soon as you can. The last thing you want to show is that you’re not able to keep up with your debts.
- Don’t make too many applications – Every single time you enquire for a new line of credit, this will be recorded and will influence in your credit score. Think about it: you are already borrowing money and you’re asking for more money. This, of course, can make lenders wondering if you are good with money or not.
There are different kinds of credit scores
This might be misleading, but there are different kinds of credit scores which can result in a different score than what expected.
FICO® Scores and scores by VantageScore are the most common used by lenders but there are also industry-specific ones.
In this article by Experian.com, you can see how FICO® and Good VantageScore differ from what they refer to be a good score.
No matter which credit score your lender is using, in my opinion, it’s important to reach the highest score you can to get access to the advantage of a perfect credit score.
What can I do next?
The first step I took to build up my credit score, the right way, it has been to get a credit card.
Credit cards can be a very clever and powerful tool to manage and save you money. I’ll talk in more details about this in a different post.
In the meanwhile, if you’re a UK resident you can apply for a British Airways American Express® Credit Card with no annual fee and you can earn Avios to pay for your travels.
All you have to do is to register through my referral link here where you can earn 6000 Avios instead of 5000 if you were signing up un the Amex website.