What is a credit score? Why does it influence your loan applications and how? Let’s do a quick run down of what credit score is and the various ways that you can keep a good credit record.

In the previous article, we briefly touched on the term credit score and how maintaining a good score can help you fast-track your application for an installment plan. Aside from that, having a good credit score also increases the chances of getting your application approved.

But why? What is credit score, really, and why does it matter? How is it computed?

So today, let’s try to dive deeper into the realm of credit scores and all the reasons why they matter. We’ll also give you some tips on how you can maintain or improve your credit score for future references.

You ready? Let’s start!

 

What is a credit score?

When taking an installment plan, you are borrowing money with the promise that you will pay it back within a given time period. And because lending money involves financial risks, creditors need some form of assurance that you’re capable of paying back what the money that you borrowed.

Enter the credit score. Basically, a credit score is a numerical grade that allows creditors to judge your credit within a given point of time. It measures your ability to pay back what you owe in a timely manner.

The higher your score, the more attractive you are as a loan customer. With good credit score, lending companies would be more willing to let you borrow more money or offer lower interest rates.

Bad credit scores, on the other hand, may mean your applications will be denied or that you will be given loans with higher interest rates.

Simply put, good credit scores more often than not lead to better loan rates and terms.

 

Who computes the credit scores?

Lending companies themselves don’t compute your credit score. Instead, there are different credit bureaus they depend on for that.

Here in the Philippines, we have three independent credit bureaus: Credit Information Bureau, Inc (CIBI), TransUnion Philippines (TU), and Compuscan Philippines.

 

How are credit scores computed?

Each credit bureaus are equipped with their own unique computation method so you can expect that your credit score may differ when computed by different credit bureaus.

When computing for your score, these bureaus weigh in several criteria:

• History of your repayments
• Amount of current loans (if any)
• Age of credit account
• Types of past and existing credits
• How many loan applications you’ve had in the recent years

 

Maintaining or Improving Your Credit Score

With a quick look at the criteria given above, you can have a basic grasp of how healthy your credit standing is. If it is on the healthy side, congratulations! You have a high chance of getting approved for your next loan application. All you have to do is to maintain this credit score well into the future.

If you’re on the low side, no need to despair. There are still ways to pick up and improve your credit scores. Let’s quickly discuss these few tips that may help you improve or maintain your credit score.

 

Tip #1: Be a good payer

Late payments can weigh your credit score down, so try to pay all your existing loans in a timely manner.

The same thing goes with all your utility bills. Whether it’s your electricity, water, phone, or Netflix subscription bill, credit bureaus take unpaid bills as a sign that you are not a good payer and will give you a bad credit score.

 

Tip #2: Keep your debt level to a minimum

Credit bureaus take the total amount of your current loans into consideration when computing for your credit score, so it is best to keep your debt level to a minimum.

Think about it: would you be more willing to lend money to someone who has existing loans or to someone who has a minimal record? Who do you think would have an easier time repaying the amount he borrowed?

If you have an existing loan, try clearing it out as fast as you can. There are different ways you can do this without putting too much strain on your bank account.

On the other hand, centralizing your loans is a good way of dealing with multiple existing loans. One great way to do this is to apply for a personal loan (also called salary loan) and using it to pay off your existing loans. Not only does this help you keep your debt level to the minimum, but also eliminates the stress of keeping up with multiple loans.

 

Tip #3: Keep track of your credit types

Different types of credit affect your credit scores in different ways. Mortgages and car loans, for instance, tend to have a more positive effect on your credit score than credit card loans.

Read the fine prints of different credit types before availing them. Some may seem like a “good steal” at face value but can give a negative effect in the long run.

 

Tip #4: Limit your credit applications

Most people think that applying for more loans can increase their credit scores; however, this is not exactly the case.

Whenever you apply for a new loan, your credit reports get looked at and these views or “hits” as credit bureaus call them are sometimes interpreted negatively by credit bureaus and may lower your overall credit score.

Only apply for a loan when you absolutely need it. If necessary, check other available payment options before applying for a new loan.

 

Tip #5: Patience is a virtue

Understand that building a good credit score takes time and effort. The key here is consistency and keeping your eyes on the

In the meantime, exercise self-discipline and try to avoid unnecessary expenses. Construct a budget plan that works for you and stick with it, so you can manage your finances responsibly. When these small things add up, they can go a long way in building a good financial and credit history.