Too often, people enter adulthood with absolutely no idea of how to build or maintain credit—that infamous triple-digit number that can impact your buying power throughout your entire life. This information deficit has led to an entire generation of people who have suffered through poor financial choices and need to repair their credit.
Why Worry About Your Credit?
Do you have dreams of owning a nice home or a reliable car? Most of us can’t afford to pay cash on the spot for a house or a new car. Chances are, you’ll need to qualify for a mortgage or an auto loan for these major purchases. That means your credit score will come under scrutiny.
A credit score is a primary measure of an individual’s creditworthiness. Put another way, your credit score is a strong indicator of whether you can be trusted to repay your debts. In general, the more responsible you’ve been with repaying previous debts, the better your credit score will be.
Why does a good credit score matter? Here are just a few reasons.
Interested in applying for that credit card with a sweet sign-up bonus and amazing travel perks? Those are typically only available to consumers with excellent credit scores!
Applying for a mortgage? Your credit score is the number one factor in the rate you’ll get on your loan. Just a few points can cost you $10,000 or more in interest over the life of your loan! Your credit score can also influence pricing, down payment and loan options as well!
Having a strong credit profile goes beyond borrowing money too. Some landlords consider credit score when evaluating rental applications. Insurance companies factor your credit score into your insurance premiums. Utility companies and internet service providers look at your credit to decide whether you’ll need to make a security deposit as a new customer.
Clearly, the benefits of a strong credit profile are nothing to sneeze at!
Tips to Help Improve Your Credit Score
The good news is, a less than perfect credit score isn’t a death sentence. If you’re looking to get your credit score back on track, consider the following tips:
1. Credit is Built on Credibility – Always Pay on Time
In most cases, your credit score is pulled from one of three different places—TransUnion, Equifax, or Experian. These credit reporting agencies compile data from your creditors and from your financial activity. They may produce slightly different scores, but the final numbers aren’t usually too far apart.
Any number of factors can impact your score. While various credit scoring models may weigh each factor differently, they tend to place the most emphasis on the following categories of information:
- Payment history
- Credit usage
- Length of credit history
- Credit mix and types
- Recent credit
The most important factor? Your payment history!
There’s nothing better for your credit score than a long history on on-time payments. When you miss a payment, the creditor has the right to report the delinquent payment to the credit bureau. A single derogatory mark can lower your credit score. This negative impact is only compounded with additional missed payments.
When facing a financial hardship—like a job loss or some sort of emergency—it’s always best to contact your creditors and make them aware of any late payments. Communicating with creditors ahead of time can be all it takes to keep them from reporting your delinquency to a credit bureau. That can afford you time to work through your financial crisis while keeping your credit score intact.
2. Don’t Max Out Your Credit Lines
While it can be tempting to take that nice shiny new credit card to the store and splurge on all your “wish list” items, don’t do it! Maxing out your lines of credit will not only bust your budget, but it will lower your credit score. What I’m referring to is called “credit utilization.” Simply put, your utilization rate is the amount of your available credit that you use at any given time.
Your utilization rate gives an indication of your ability to pay back creditors and use credit responsibly. Overutilization suggests to creditors that you’re in a hurry to take full advantage of your credit. That can lower your credit score and lead creditors to believe you’re a riskier bet to lend to.
Experts recommend keeping your card utilization rate below 30% of your total available credit. A utilization rate that exceeds the 30% mark can indicate that you’re slowly losing financial traction and are borrowing more and more just to keep up with your current expenses.
The best way to keep your utilization rate in check? Pay your credit card balances in full every month! If that isn’t an option, do whatever it takes to make more than the minimum payment.
3. Not All Loans Are Created Equal
Nobody ever wants to be late on a payment. But it’s worth noting that a late payment on certain loans will count more against you than it will on others. As a rule of thumb, you can refer to this list if you need to make a tough decision about which payments to prioritize:
- Mortgages and home-related loans are the most important
- Student loans and auto loans comprise the second tier
- Credit cards are middle of the road
- Specific credit lines—those associated with certain stores or in-house financing
- Medical bills have the lightest impact on your credit score
It makes sense when you think about it in terms of necessity; a homeowner who’s in good standing with their mortgage lender proves their ability to maintain necessary assets. Vehicles come next, followed by other nonessential items. Medical loans are often given leeway because of their unexpected and expensive nature.
And don’t forget – never take out a loan or line of credit if it will interfere with your ability to pay any of your priority loans.
4. Mix Things Up
Different loans can impact your credit score differently. Although your credit mix is a minor factor in your credit score, it’s worth paying attention to. Having experience with different types of credit may benefit your credit health.
You certainly wouldn’t want to obtain a loan and pay unnecessary interest for the sake of diversifying your credit mix. But, for example, if you’ve only ever had installment student loans, you could benefit from applying for a credit card and using it to pay for gas, phone bills and other minor expenses than you can afford to pay off each month.
5. Take Responsibility for Your Own Credit
There are a huge number of credit reporting tools currently on the market. Many are free and can provide accurate information about what’s impacting your credit score. People sometimes experience a sudden drop in their credit score that can be attributed to something they were completely unaware of. Monitoring your activity is as simple as downloading a credit app and or contacting one of the three major credit bureaus.
It’s possible for there to be several mistakes on your credit report. And the longer these errors remain on your credit report, the more damage they can do. It’s important to follow your financial transactions closely for credit repair answers and to make sure that only your information is being included in your credit report. Sometimes, activity can be erroneously assigned to your credit history. You’ll want to remove that information quickly before it does damage to your credit score.
In some cases, you can pay off a loan or make a scheduled payment on a line of credit that doesn’t appear on your credit report. Your credit report may show that you still owe the money or that you have a delinquent payment. Catching and correcting these errors right away can prevent your score from going into a freefall. It’s also much easier to fix the mistake as soon as it happens rather than trying to update your credit score later on.
Healthy credit means taking some responsibility for what’s going on your credit report and making sure that only accurate entries are impacting your overall score.
6. Maintain Your Lines of Credit
Once you’ve paid off a credit card or a loan, it can be tempting to completely close out the account. Think again. This might actually be a big mistake, especially if you’ve had the account for a while. There are a variety of factors related to the length of your credit history that can affect your credit. For example, your credit score can be affected by the age of your oldest account and by the average age of your accounts in general. Thus, the longer you maintain a healthy line of credit, the more your credit score will benefit.
Pro Tip: If you’re applying for your first credit card, make sure you get one with no annual fee. Even if you stop using the card, you can add age to your credit file (and improve your utilization ratio) without any effort.
The Benefits of Long-Term Financial Responsibility
While there’s no substitute for long-term financial responsibility, the strategies I just described some of the best ways to raise your credit score quickly with minimal effort. With this knowledge in hand, it won’t be long before you’ll be able to take advantage of reduced interest rates, better credit card offers, and lower insurance premiums – all of which can result in massive savings over the course of a lifetime!
So, now that you know what your credit score is made of, why wait to improve your credit profile? What are you going to do today to raise your credit score?