Become a Credit Card Curator
(Photo : Image by Michal Jarmoluk from Pixabay )

Credit cards are must-haves in today's society. Not only are they helpful in emergency situations, but they are essential in the quest to build credit.

Unfortunately, many people struggle to understand credit. Any misunderstanding or conceptions in the area of credit can lead to major setbacks or financial hardships. In fact, a large portion of the population struggles with too much credit card debt.

The truth is credit isn't just the magic nonexistent money that allows someone to make large purchases. Credit is a factor used by many businesses and institutions to determine whether someone should be granted admittance, a loan, or even car insurance.

There are ways to better understand credit and learn how to use it to your advantage. Learning the basics of credit and its long-term, wide-reaching effects, like how credit score impacts car insurance, are the first steps to become a credit curator.

What is a credit score?

A credit score is a three-digit number, between 300 and 850, assigned based on the credit history of an individual. Lenders and other business entities use that score to determine how reliable a person is, how and if they will be able to repay a loan. The closer a score is to that 850 mark, the better an individual's creditworthiness.

The current credit score model was developed by the Fair Isaac Corporation, also known as FICO. A person's FICO score is one of many scoring systems used by lenders and other businesses.

As the world of credit has grown and developed, other credit reporting agencies have entered the scene. These other agencies include TransUnion, Experian, and Equifax. These agencies gather and analyze the credit history of a person to determine a credit score. The FICO score, however, is the most widely used and trusted in the credit industry.

How is a credit score determined?

There are five factors used to determine a person's credit score: payment history, total amount of debt, length of credit history, type of credit, and new credit. Each factor accounts for a different percentage of a person's credit score. For example, payment history accounts for 35% of an individual's credit score, while length of credit history only accounts for 15% of a score.

A general rule of thumb is any credit score below 640 is considered subprime and the borrower is less desirable. This does not mean that loans are impossible to receive, but it does mean there are other stipulations placed on money loaned.

In many cases these lower scores are seen as riskier, so lenders may assign higher interest rates, demand short repayment terms, or require co-borrowers.

Any score over 700 is good, and a score over 800 is excellent. Higher scores usually mean a lower interest rate and less money paid out over the life of the loan.

Understanding how these different factors work together or balance out to determine a final score can be overwhelming. The various percentages and overall credit score breakdown can be confusing.

The good news is, if you find yourself on the lower end of the credit score spectrum, there are ways to improve your score.

How do you improve your credit score?

A person's credit score is very fluid. The five factors used to determine a person's score are always changing and evolving. This is good news for the person working to take control of their lives financially and improve their credit score.

#1 - On-Time Payments

The first way to improve a credit score is to make all credit payments on time. This may seem like a simple solution, but it doesn't translate to immediate positive changes in a credit score. To see true, positive change in credit reporting, you need to make payments on time for at least six months.

However, it's a good habit to get into and will eventually lead to big changes in your credit score and perceived creditworthiness.

#2 - Work with a Credit Repair Agency

If you find yourself in a very low credit range (300 to 579), consider working with a well-known and trusted credit repair agency.

These companies work with creditors and reporting agencies to create a plan to repay credit, improve credit scores, and find credit card relief. This service usually requires a monthly fee, but they can improve many people's credit scores in a short period of time.

#3 - Strategic Use of Credit Cards

One easy way to improve a credit score is to apply for and use credit cards. This doesn't mean, however, that you should charge excess amounts to your credit cards and carry those high balances for long periods of time. Those kinds of habits lead to stress and a seemingly endless attempt to keep up with credit card bills.

There are strategies and smart ways to use credit cards to positively influence a credit score.

Become a Credit Card Curator
(Photo : Image by Michal Jarmoluk from Pixabay )

How do credit cards affect credit scores?

Often when people think of credit and credit scores, they think of credit cards. This is not an inaccurate association. In fact, credit cards can improve credit scores if they are used in a methodical and strategic way.

#1 - Keep a Small Balance

Aside from making monthly payments regularly and on time, it's helpful to keep a small balance on your credit cards. This may seem counterintuitive, but it's true.

Keeping a very small balance on your credit cards will help create a low credit utilization rate. It will appear that you use a small portion of the total credit available to you. The best way to keep that small balance but ensure it doesn't get out of hand is to charge a small amount and pay the full balance each month.

#2 - Increase Credit Limits

Another way to improve or repair your credit score is to increase existing credit card accounts. If you have existing lines of credit, call the lenders and request an increase in the credit limit. If your accounts are in good standing, then you may receive an increase in total credit available.

The higher a credit limit and the lower that total limit is used, the better. This translates to a better credit utilization rate or, more simply put, how much and how often that credit is used.

#3 - Keep Credit Accounts Open

Many people believe that inactive accounts should be used. That, however, is not true. Most credit card accounts should remain open, even if they aren't being used anymore.

This may seem a little strange, but closing credit card accounts can negatively affect your credit score. Ultimately, it depends on the age and amount of credit available, but closing a credit card account can raise your overall credit utilization rate. The higher this rate, the lower your overall credit score will become.

#4 - Get a Lower APR

The annual percentage rate, or APR, is similar to the interest rate on credit charges. The higher the APR on a credit card the more interest an individual will pay over the life of their credit charges.

In many cases, credit companies will advertise lower, introductory rates, but those rates will increase after a certain period of time. Luckily, you can negotiate the APR on some credit cards after the introductory period expires.

What Are the Effects of Credit Scores?

An individual's credit score really does follow them around. It is not resigned to matters of monetary loans or bank business. Credit scores are used by many other businesses to determine the trustworthiness, or risk level, of an individual.

In fact, many car insurance providers use an individual's credit score as a determining factor. Not surprisingly, a higher credit score means a lower premium. This can be a hardship for many people who struggle with bad credit.

Car insurance is required in most states, and most insurance providers use credit scores in some way. It can be a vicious cycle. Almost all car insurance rates are based, at least to some degree, on an individual's credit score.

So it's not just a good idea to think about your credit score, but your credit score has larger implications in the real world. Consider your credit score non-negotiable and implement some of these strategies to increase your score and reap the benefits.

About The Author: Laura Gunn researches and writes for the auto insurance comparison site, AutoInsuranceEZ.com. She is passionate about credit and wants to help people understand the power they have to control their own credit.