Your credit score is one of the most important aspects of your financial life. Credit scores are used increasingly as a way to gauge your character, in addition to your ability to handle financial obligations. You might be surprised to find that your insurer, landlord, cell phone service provider and employer are all interested in your credit score; lenders aren’t the only people looking at your score.
A credit score is your financial reputation. If you have a high credit score, you have a solid financial reputation that will save you money on loan interest fees, insurance premiums, and even help you get a job. A low score can mean that you pay a higher security when you rent a home, and that a cell phone service provider may not allow you to sign up for certain plans. A FICO credit score ranges between 0 (very poor) and 850 (perfect). Here are 9 steps that will help you establish good credit and maintain a high credit score.
Because your credit score measures how well you meet your credit obligations, it is obvious that you will need credit of some kind. You can apply for a small personal loan from your bank, get a small car loan (you may need a co-signer if you don’t have established credit), or open a major credit card.
In many cases, the easiest and fastest way to begin building good credit is with the help of a credit card. You may have to start with a lower credit limit, or with a higher interest rate. However, as you use your credit card responsibly, you will be eligible for better interest rates and higher limits.
How you use credit is important. Just because you need to use credit in order to build an excellent credit score doesn’t mean that you should always use it. Following good habits, such as charging only a few things each month, and paying off your balance, can help you build a solid financial reputation without incurring interest charges and getting trapped in the web of debt.
According to FICO, the main provider of credit scores, the most important factor in your credit score is your payment history. If you want an excellent credit score, you need to make your payments on time, and in full. This means paying – at the very least – your minimum payment each month, and doing it on time.
You need to pay attention to more than just your loan payments, though. While most utilities won’t report your on-time payments to credit bureaus (as credit card issuers will), they will report you if you miss a payment, or pay late more than once or twice. Medical service providers, yard service companies, satellite TV providers and others will report you if miss too many payments. Additionally, anyone you owe money to can send the account to collections – at which time it is reported to the credit bureaus.
If you want to maintain a sterling financial reputation, on-time payments are a must. Send payments early when using regular mail, or use online bill pay to schedule payments so that they are guaranteed to arrive on time.
After your payment history, the most important factor contributing to your credit score is your debt level. Your credit score takes into account how much of your available credit you are using. If you have maxed out your credit cards, you will be penalized in your credit score, even if you make on time payments.
For best results, your credit card debt should amount to no more than 30% of your available credit. If you have a credit card with a limit of $1,000, that means that you should carry a balance of no more than $300.
How long you have had credit also influences your credit score. The longer your credit history is, the better off you are. Your oldest account will be considered, and so will the average of all of your accounts. If you have an account that was opened in the last year, and an account that is 6 years old, your average account age is 3.5 years, since the total history is added up and divided by the number of accounts. If you want the best score possible, maintain older accounts, and open new accounts only after careful thought.
In addition to credit use in general, your credit score will also be based on the types of credit that you use. There are two main types of credit accounts:
For an excellent credit score, you need to have a mix of revolving accounts and installment accounts. If you have a mortgage and a car loan in addition to two or three credit cards, that can be beneficial to your credit score, provided you haven’t maxed out your credit cards and your installment loans are relatively modest.
All types of credit are not equal, though. If you want an excellent credit score, you will need to try to avoid payday loans and title loans. These types of accounts can be detrimental to your credit score. Also, realize that credit cards from department stores do not have the same positive influence that you will find with a card from a major issuer (i.e., MasterCard, Visa, American Express and Discover).
There is no reason to open many credit accounts. A few accounts, from respected lenders and creditors, are sufficient to help you build an excellent credit score. Additionally, applying for credit can bring your score down. This is especially true if you apply for several different accounts in a short period of time.
Clustered credit checks for a car loan or a home loan won’t hurt your credit score, but applications for more than one credit card, or for different types of loans, within a few weeks can harm your score. Instead, carefully consider what you want the loan for, and look for the best deal.
Do not borrow more than you need. Borrow as little as possible so that you will not have difficulty making your payments on time, and so that it adds only a relatively small amount to your debt load. Don’t buy a bigger house just because the mortgage lender will approve you. The same rule applies to your education and to cars. Figure out what you need, and borrow only that.
A good-sized down payment will help you reduce the amount of money that you need to borrow. Save up ahead of time for a down payment. Proper financial planning can help you avoid too much debt, and help you keep a good credit score.
When you practice good financial habits, you are less vulnerable to financial problems that can result in a lower credit score. Build an emergency fund so that you don’t have to turn to your credit cards in the face of financial catastrophe. Spend less than you earn so that you aren’t getting into debt. Properly insure your assets so that if something happens to your home, car or health it doesn’t completely devastate you financially.
Additionally, recognize that there are special credit scores just for banks. If you habitually overdraw your bank account, you will be reported to ChexSystems, and you may have difficulty opening bank accounts and investment accounts elsewhere. Create a budget and follow it, and you will be less likely turn to debt to get you out of tight corners. When you are firmly in control of your credit, you can use it as a tool to maintain an excellent credit score.
Your credit score is based on information in your credit report. This means that you will need to check for errors. If a piece of erroneous, negative information remains on your report, it can lower your credit score. Don’t wait until a lender denies you credit. You should check your credit report regularly and fix errors.
You are entitled to a free credit report from each of the three major bureaus every year. You can go to annualcreditreport.com and get a free copy. Check the report for duplicate accounts, fraudulent accounts and other mistakes that misrepresent your situation. Then, have them fixed. Once these errors are corrected, you should see an improvement in your credit score.
Consider, too, that there are a number of credit scams out there. You need to be on the watch for credit scams related to getting your personal information, as well as fraudsters claiming they can guarantee you a higher credit score.
Keep your personal information private. Do not give out your credit card number, Social Security number or other personal information to those who ask for it. If you are asked for personal information in an email, a letter that came in the mail, or a phone call, do not respond. Instead, call the customer service number on the back of your credit or debit card, or look up the customer service number on the bank’s official web site. Scammers are quite sophisticated, and can spoof a caller ID to look like your bank, or build a web site that seems official. Realize that no legitimate organization will ask for your complete account number, and you almost never need the security numbers on the back of your card unless you are shopping online.
Also, be on the alert for companies that claim they can boost your credit score. All of the legal ways to boost your score are things you can do on your own. Shady methods of helping your credit score, such as adding you as an authorized user on someone else’s card, might work in the short term, but long term they could do more harm than good.
Your credit score is the key to an ideal financial situation in today’s world. You need to pay attention to it, or you might be surprised at what it can cost you. There is no shortcut to a permanently good credit score. With proper planning and maintenance, you can enjoy the benefits of an excellent credit score.
It’s also never too early to teach your kids about financial responsibility. Start when they’re young and they’ll face less hurdles as they grow up.