There are many reasons why you may need to borrow money. For example, if you’re dealing with a medical emergency, you might need extra funds to cover some costs that couldn’t be covered by your savings. Meanwhile, if you’re an entrepreneur, you might be on the verge of growth and need additional funding for acquisition or advertising.

However, your application to borrow money may not always be approved. In particular, if you have a low credit score, lenders may view you as a liability and deny you from getting a loan.

The question now is: what is your credit score and how do you raise it so you can improve your rating? Read on below to know more.

What Is Your Credit Score and Why Is It Important?

Your credit score or credit rating is a figure that creditors or lenders can use as a reference to gauge your capability to repay a loan. In the Philippines, the standard credit scoring ranges from 300 to 850 and the goal is to be as close to 850 as possible. A credit score of about 700 to 760 is a good benchmark, although 650 may already be considered “fair.” Anything lower than this is already in the “bad” territory.

Keep in mind that there’s always a risk that a borrower will default on their loan. To avoid losses, financial institutions prefer customers who have the lowest possibility of non-payment. In short, if you want your loan applications to be approved, you’ll have the best chance if you have a high credit score.

How Do You Know Your Credit Score and How Is It Computed?

To know your credit score, you can get your credit report from the Credit Information Corporation or CIC. The CIC calculates your credit score using information such as, but not limited to the following:

• Your credit payment history. This includes whether you pay your debts on time and how much you pay every time (e.g., minimum amount due, more than the minimum, or in full).
• The total amount you owe. The CIC takes a look at how much of your credit limit you spend. This is also referred to as your credit utilization ratio. The logic is that if you’re often maxing out your credit, the likelier it is that you’re going to miss payments.
• Length of credit history. This factor considers two time periods: (1) the average age of all your lines of credit and loans and (2) how long since you have used them.
• Your credit applications. Whenever you apply for a credit card or loan, the CIC will receive an update from the bank or lending institution. Having multiple active applications at once may hurt your credit score—emphasis on may.
• The credit types you have used. Some examples of credit types include cash loans, credit cards, and mortgages.

The CIC collects the above-mentioned information from various entities, like banks, lenders, and service providers, as stated in Republic Act 9510 (Credit Information System Act or CISA). That said, the CIC doesn’t share the exact method or formula they use to compute your credit score.

How Do You Improve Your Credit Score?

Now that you know the key role your credit score plays in your financial planning and management, the next step is to try and improve it. Here are some practical tips you can follow:

Pay All Your Bills on Schedule

As mentioned, the CIC takes a look at your credit payment history when calculating your credit rating. To boost this percentage of your score, make sure to pay ALL your bills on time and not just your credit card bills and loan amortizations. From your home utilities to your entertainment subscriptions, make sure that every bill is settled on or before the due date. Missing just one payment can result in a huge credit score deduction.

Take Out Loans One at a Time

There are times when a single line of credit may not be enough to cover all your expenses, say for a major home renovation. However, keep in mind that if you apply for multiple loans at the same time, it can be a red flag for the CIC. It’s not against the law to borrow money from multiple creditors, of course. However, it also increases the risk of you being unable to settle your dues. In addition, getting denied in your loan application has a negative effect on your credit score.

As such, it’s best to apply for loans one at a time and at most have two to three active loans that you’re able to consistently pay for. If your first application gets declined, space out your next application accordingly. Another good piece of advice is to not submit an application until you’ve found the one that best suits your situation so you can limit the number of rejections.

Meanwhile, if you don’t have a history of borrowing yet, start small. Find a loan online with a simple application process and quick approval. Then, make sure to pay off your balance on or before the due date. This will not only help build good financial management habits, but also establish a foundation for a robust credit score.

Own More Than One Credit Card BUT Don’t Max Them Out

When you have multiple credit cards, particularly those with a high spending limit, it may be taken as a sign that you’re capable of paying off your loans. This can help improve your overall credit score. That said, the operative word here is “may.” Indeed, having multiple credit cards doesn’t automatically mean that you’re a responsible borrower. For example, if all your cards are maxed out and you have a high credit utilization ratio, your credit score may be lower than you think.

The key is to try to keep your usage of your credit cards at or below 30% as much as possible. If you have a card with a Php 10,000 limit, don’t exceed Php 3,000 of usage. This may feel a little restrictive, but it’s definitely better for your credit score and can even improve your future borrowing prospects. In fact, some lenders may be more lenient with due dates or even offer lower interest to clients with good credit standing.

If you don’t have a credit card, you can try applying for one with a low credit limit at first. Then, start using it to pay your utility bills; make sure to settle the balance in full on or before the due date. Like taking out small loans and being a responsible payer, this will help establish your good reputation as a borrower.

Borrow Using Multiple Credit Products

As previously mentioned, the CIC and various financial institutions love responsible borrowers. One good way to show this is by availing of multiple types of credit products. For example, if you have a personal loan and two credit cards that you’re able to manage without trouble, your credit score may increase.

Don’t take this as a license to take out loans left and right, however (see the second point). Your goal is to show that you’re financially mature and a good customer. Should you miss out on even just one due date, your rating will take a big hit.

Some of the best and easiest loan products to try to improve your credit score include personal loans and cash loans. Both of these don’t require any collateral, and lenders usually have less strict requirements for these credit products. Once you’ve built up a sufficient credit score through these types of loans, you’ll have an easier time applying for bigger ones in the future.

Open a Savings Account

If you’re planning on growing your wealth, a savings account isn’t the way to go. However, having one is definitely good for your credit score. Just make sure that you’re depositing in it regularly, even if it’s only in small amounts. This shows you have positive money habits and that you’re able to set aside some of your income instead of spending it all in one go.

Make a Budget!

It isn’t something that the CIC or any lender can see, but making a budget and sticking to it can actually help you improve your credit score. For one, a budget gives you a clear picture of your finances. This is crucial in planning your allocations and payment schedules, so make an effort to be as detailed as possible.

In addition, having a budget helps you identify habits that can hurt your credit score. Do you have too many streaming subscriptions but only make the most of two? Do you spend too much on specialty coffee or bubble tea? Are you pressing the “Checkout” button on your shopping apps too often? Through an itemized budget, you can reprioritize and get your finances in order.

Obviously, you can get by in life without ever thinking about your credit score. That said, if you’re unaware of your credit score, you might encounter a bit of trouble when you’re applying for a loan (and right when you need it most).

As such, it’s a good idea to keep track of your rating and consistently practice positive financial habits. This way, you’ll be seen as a good potential customer by creditors.