Here’s a simple fact. Your credit score is one of the most valuable assets that you possess. If you are the one in 10 million that rolls around in cash and that doesn’t ever or won’t ever need to have credit, congratulations! But while the 1% bathes in their pile of cash, the rest of us need to watch our credit. You see, to be real, you can never take for granted your credit score. It is always a big part of your life even when you don’t think it is. I’ll explain.
To begin, your credit score is like your transcripts from school. It is a history, a report of your responsibility and track record of how you handle your finances just like your transcripts indicate your skills at academic endeavors. If you don’t have one, it is like applying for work and having no high school or college diploma. And if you do have one, it will follow you around either like a weight around your neck or like a life preserver to help make things safer and easier. A potential employer or landlord might check yours and it all has to do with what you have done, do, and will do!
According to a survey by Credit Karma in January 2016, 30% of all young people under the age of 30 admit that they have made big mistakes with their credit and are suffering because of it. That kind of situation may take years to recover from and can affect things like home buying, car loans, insurance rates, and even your possible employment, if it’s serious enough. Understanding how your credit is evaluated and what you can do to make sure you have “good credit” and a “good score” is so important. Understanding what credit habits you need to stop is as important as knowing what to do.
How to Improve Your Credit Score
Here is what you need to know about credit and recommendations to get your credit worthiness and score into good standing.
1. Understand credit score basics
Your credit score is established with the Fair Isaac Corporation (FICO) and they track and provide information to the 3 major credit bureaus: Experian, Equifax, and Trans Union. Scores range from 300-850 with an average score being about 695. When your score reaches 740, you are at a level where you will get offered interest rates on purchases and credit approval that is much better than average. The best rates available are for people that have scores even higher. Knowing your score is something that you should make a priority and trying to improve it is vital. You can get yours for free at many sites, including Credit Karma, Wallet Hub, Free Credit Score, and Credit Sesame.
2. Credit scores are determined from a mix of factors
Here’s what’s in your score according to myFICO:
10% – From the kind of debt or credit mix you have
15% – From your length of your lifetime history
30% – How much you currently owe
10% – How much new credit you have
35% – Your payment history
3. Your percentage of credit used is a huge factor
Your score will suffer when you use a lot of your credit that is available. It doesn’t matter as much how many cards or credit lines you actually have, but rather the percentage you use. If you have 10 credit cards available with a total of $100,000 ($10,000 each) open credit that you can use, but only use a balance of 10% ($10,000) on one card (10% utilization), you are much better off than if you have 3 cards with total credit of $30,000 and usage of $3333 each (33% utilization). If your utilization is high, you might be able to ask for an increase in one of your existing credit lines to improve your percentage, but don’t open new credit lines to do this.
4. Eliminate balances quickly
Lot of small balances on a number of credit cards indicate you have open balances on a regular basis and use it all too often. Establishing regular payoffs will show you are eliminating open balances and are in full control.
On the other hand, if you have larger balances, you’ll need to get serious about paying down your debt. It’s time to stop racking up charges on your credit cards. Look to see how you can increase your income and reduce your expenses to put additional funds towards your debt payments.
5. Leave “old history” on your credit report
It is an advantage to have old records on your report. Previous payments of an old mortgage for example that has been fully paid off is a good thing to have. Too many people think that they should expunge old records or close old credit lines. That would be like not telling anyone you had a college degree when applying for an important job!
6. Check your credit report often
According to the FTC, 1 in 5 consumers find errors on at least one of their credit reports. And 1 in 4 consumers identified errors that might affect their credit scores. You can get your credit report for free with all the details from services like Credit Karma, Wallet Hub, and Annual Credit Report. Checking every 3 months is advisable.
7. Don’t drag out your credit application too long
The calendar isn’t your friend when you are shopping for a mortgage or a car loan. If you don’t establish that new credit within a period of as little as 14 or as many as 45 days (depending on the lender), it can hurt to have an open application against your record. It is counted as open credit at some point and that’s bad especially when the amounts are higher than a typical credit card.
8. Pay all your bills on time, every time
At least make the minimum payment! It should go without saying, but this is a must. Lenders will love you and lend to you and supply more credit with better terms when they know that you will pay them back in a timely manner. It’s that simple. Just try and borrow if you have a black mark like lawsuits for failure to pay someone or a bankruptcy on your record. Even though medical debts are not as prevalent on your credit report, they can become an issue if they go to collections.
So set up an auto pay if you’re able so that you never miss any payments. Otherwise set up reminders on your calendar. Whatever you need to do to pay on time. And if by chance you accidentally miss a payment, contact the creditor right away to make arrangements.
Your credit score and report can be a major asset in your financial life. But it can also be a real burden if you don’t take it seriously and understand how it can work for you. Now is the time to check on your credit if you haven’t done so yet and improve your credit score. Checking it and making corrections are not difficult and in the long term can be a huge help to you and your family!
Have you checked your credit score and credit report lately? Have you ever found an error on your credit report?