Lifestyle

Five things you should know about your credit score and why it's important

Before you are lent any money, a lender needs to check your credit score (Shutterstock)

You want to advance your horizon financially by acquiring more things that are not necessarily within your reach. This means you’ll have to consider borrowing.

However, before you are lent any money, a lender needs to check your credit score to see whether you are worthy of the credit. The means to determining your worthiness for a credit is through knowing your credit score.

What does credit score mean?

It is common for credit agencies to keep records of your history of payment, how many credit cards you have, and how much you owe different institutions that you have borrowed from over time.

After this analysis, your credit score is generated by each of the credit bureaus. This allows lenders to know your credit worthiness as it plays as a record of the risk involved in lending you money.

You may need your credit score checked and analyzed especially when you want a car loan, personal loan, mortgage or any other form of lending accorded to you.

What makes up your credit score?

A lender is able to know your credit score from the analysis report from a few factors.

It could be your payment history and whether it indicates if you pay your debts or not. The number of open accounts you have and how long you've had each open also matters in giving the expected credit score information.

Your credit score can also be determined by knowing the amount you owe as compared to available credit. Some of the technical ways your credit score is calculated involves percentage of credit score calculation:

The first 35% tracks your payment history. To achieve this score, ensure you pay your loans and credit card bills on time.

Secondly, 30% constitutes amounts owed involving credit utilization ratio. In light of this, ensure you use your available credit well without going overboard. The next 15% checks the length of credit history.

If you've been using credit longer, you have a better score since they can assess your credit worthiness over a period of time.

In the next 10%, your credit mix is assessed. You are encouraged to have a variety of accounts like credit cards which are revolving debt and mortgages which are installment loans.

The final 10% is assessed to check for new credit. Under this, it is recommended that you try to avoid applying many new credit cards and loans, especially when it's within a short time period.

How to ensure your credit score is good

What you should do to ensure you're not on the bad trap of negative credit score is if you start by making smaller purchases and paying them off on time.

To have good credit history, you need to have a good history in making your payments. A lender wants to see if you pay on time so that they determine whether you're credit worthy.

It is important to keep your balances well under your credit limit and not go overboard as this gives your lenders a negative impression.

Fixing any problems with your credit card

Sometimes your credit score can go off and it's your responsibility to notice the difference, report it and get it fixed.

Avoiding to fix this could lead to accrued problems which end up ruining your credit score.