The essential component to most financial goals – unless, of course, you’re a trust fund baby – which I am not. And if you’re like me, then you need this simple guide to understanding your credit.
Whether you’re preparing to buy your first home, self-fund a business idea, or need to upgrade your ride, your credit will likely be front and center for the process.
Your credit score is the key indicator that lenders use to predict creditworthiness. If you have a history of paying your debts in a timely manner each month, creditors see that as the model for how you will handle future credit obligations – and they will see you as less of a risk for extending additional credit.
I’ve compiled a short list of the top tips to help you better understand how your credit score works and how you can improve it!
Keep your utilization low
I know that you’re excited that they approved you for a $5000 limit… but don’t run out and max it out! How much, of that limit, you use is called your credit utilization rate. Most lenders recommend staying at 30% or below. Meaning try to keep your recurring balance at or below $1500.
tip – ALL open lines of credit factor into your credit utilization rate. If you have open accounts with zero balances, that can actually improve your credit score because the utilization amount for that account will be 0%.
Get rid of small balance cards
A portion of your credit score is calculated based on how many cards you have that have balances. If you’ve opened several accounts and they all have balances, focus first on paying off the smallest credit limit balances. Then, choose one or two cards that become your go-to cards for major purchases.
If you need to create a plan for debt elimination, read this.
Don’t close old accounts
The more established your personal credit history is, the higher your score will be. It’s because the length of time you’ve had credit lines, factors into your score. If you have a solid repayment record, and the cards doesn’t have any annual fees, then you’ll want to leave it open and just allow the positive reporting to continue.
Never miss a payment
Nothing can undo a great credit score faster than missing or being late on, a payment. Whether you find a reminder app that works for you, set up auto-pay, or break out your monthly planner and do it old fashioned way, make sure that you never forget to make your monthly payment.
tip – split the amount that you plan to pay monthly in two and make two payments each month. Both payments should be made a minimum of 3 days before the due date and be 7-10 days apart. This will help to lower the total debt repayment – less interest paid out – because you reduce your principal balance faster.
Know your credit score
Don’t be credit ignorant. Pull your credit reports annually, at a minimum. Know where you stand on all of your accounts and stay on top of inaccuracies that could have a negative impact on your score. Most credit cards and even some banks offer free credit monitoring – which will allow you to not only see the status of each account but also to see how different actions affect your credit score.
It’s more than the cards
Your credit score is based on all outstanding debt… not just credit card accounts. It’s important that you practice healthy financial habits and proper budgeting, and that you are mindful of how you handle ALL of your bills. Remember, bills that aren’t credit related can still impact your score if they aren’t paid on time, are written off, or are sent to collections.