Maintaining A Good Credit Score
A good credit score is a key that can open many doors. It can affect your ability to obtain a mortgage loan or to be approved for a lease when you rent an apartment or townhouse. It can affect your chances of getting an auto loan and buying a reliable vehicle. It can determine whether banks or credit unions will extend your personal loans if or when you need them. It can open the doors necessary to secure business loans and start your dream entrepreneurial venture. It can even impact your employment chances, as some employers—particularly those filling jobs that involve financial responsibilities—will often conduct credit history checks as part of the background screening process.
For all these reasons and others, it is essential to do what you can to establish and maintain a good credit score. A credit score is more than just a number. Working to improve your credit not only opens doors, such as the ones mentioned above. It can also help you secure better interest rates on credit cards, mortgages, and loans, get approved for credit cards that offer better perks and benefits, and just generally live a more comfortable and secure lifestyle. Here are a few tips to help you build your credit and bring about all the benefits that doing so can have on your life.
Tip #1: Know how the system works
There are two methods for scoring credit, but for the sake of this article, we are going to look at just one of them: the FICO model. On the FICO scale, 850 is the theoretical “perfect” credit score. Almost no one has perfect credit, but 740 is deemed “very good,” and “800” is considered “exceptional.” 670 is the basement for the “good” credit range and is a good number to aim for if you have poor credit and are trying to turn things around. Anything below 580 on the FICO scale is considered “poor” credit.
Knowing the numerical scale is only part of understanding how credit scores work. The other piece of the puzzle is knowing how credit bureaus arrive at these numbers. Typically, a credit score is the end calculation of five key categories of information. This calculation considers your payment history, how much debt you have, your “credit age” (or how far back in time your credit history reaches), the mix of credit you have (loans, credit cards), and recent credit activity. So, many different factors can affect your credit score, from missing a credit card payment to too many people pulling your credit score in a short period. Knowing these categories and how they work can help you modify your behavior so that you build your credit score rather than degrade it.
Tip #2: Pay your bills
The single best thing you can do for your credit is to pay your bills on time. Not just your credit card bills, either, but all of them. Your mortgage; your monthly rent payment; your car loan; any student loans you might have; even small stuff, from overdue fees at the local library to parking tickets. Not all of these debts will be reported directly to credit reporting agencies, but any of them could end up getting sent to collection agencies and affect your credit that way. Making payments on time will not only build your credit but will help you avoid costly late fees or interest that will only add to your debt over time.
Tip #3: Don’t rely on minimum payments
Making minimum payments might seem to be a good compromise if you have hefty credit card bills that you can’t afford to pay. As a last resort, the minimum payment is an excellent option to have, as it allows you to make a low monthly payment and avoid a late fee. The catch is that making minimum payments repeatedly will negatively affect your credit score. The reason is that credit utilization plays a part in how your credit score is calculated. Utilizing all or most of your credit (so, for instance, maxing out a credit card with a $5,000) hurts your credit. If you are at or close to your credit limits and are only making minimum payments, you aren’t going to reduce that credit utilization, which will, in turn, continue to affect your credit negatively.
Tip #4: Avoid high balances on your credit cards
Speaking of your credit card limits, there are well-documented recommendations for how much of your credit you should be utilizing at any given time. If you have $15,000 in credit across several credit cards, try to avoid utilizing more than 30 percent of that at any given time. If 30 percent isn’t doable, absolutely try to keep each card below the 50 percent utilization rate. Not only are low card balances more manageable to pay off but keeping those utilization rates lower will also help your credit.
Tip #5: Don’t close old cards
Even cards you don’t use anymore are still lines of credit that report to credit bureaus. Keeping those cards helps keep your overall credit utilization lower, which can help your credit score. Besides, holding onto those lines of credit avoids a situation where they are removed from your record entirely—something that happens about ten years after you close a card. These closures are important because they can shorten your credit age significantly. Say you opened your first credit card at 15 with your parents as joint cardholders. Once you’re living independently, you probably won’t be using that card anymore. However, keeping the line of credit open is important, as you always want your credit age to reflect your first credit card.
These tips certainly don’t encompass all the steps you can take to establish and maintain a good credit score. Other strategies, from paying off debts to keeping an eye on your credit report for signs of identity theft, are essential too. However, starting with the five tips described here, you can begin your journey toward a more secure financial future. At Resource One, the experts at our credit unions are always happy to lend a hand if you need advice on how to improve your credit. Contact us today to start the conversation.