I’ve always found it so fascinating when you hear theories that credit scores don’t matter. Who is spreading these erroneous lies. Your credit score does matter. In fact, it matters quite a bit if you intend to ever take out a loan for a home, a business, a car or if you intend on renting an apartment or home.
Whether it’s a mortgage or a cell phone contract, good credit can open many doors in your financial life.
Your credit score tells a bit about your financial history. It will provide the bank, a landlord, etc. insight into your ability to pay the funds you have borrowed or the funds you are promising.
A healthy credit score is a big determining factor in your overall financial wellness as it will help you do things like:
…Overall, it will help you more easily and cheaply access funds.
A low or unhealthy credit score will either make it significantly more expensive and/or more challenging to borrow and get access to cash when you need it.
According to Equifax, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
Paying your bills on time is one of the biggest determining factors in calculating your credit score – at about 35%. Making consistent and timely payments will be one of the best ways to boost your credit.
For any credit card or personal debt that you take on, make it the ultimate goal to pay off the balance in full at each and every due date. If you are not able to pay off your credit card – then it likely means that you are living beyond your means. Of course – things happen – surprises occur and the credit card is a quick solution.
But putting more than you can afford on your credit card with an inability to pay your balance due results in paying high interest on that debt. Credit card interest rates average over 15%+ which leads you down a very slippery slope and makes it very difficult to keep up with.
Applying for additional credit in a short period of time or specifically in the time frame in which you are trying to boost your credit may have a negative impact on your credit score.
Hard inquiries for new credit cards, credit card limit increases, etc. may negatively impact your credit in the short term as it may indicate that there is a struggle or a need for new debt. Over time, through evidence of managing this debt appropriately and paying it off in full – the credit score will again be boosted.
But if you are in need of an increased credit score over the next 1-6 months – asking for additional credit may hurt, not help in the short term.
Your old credit accounts – credit cards or loans – tell a story to the credit bureaus about your past relationship with them and your ability and reliability in paying back the funds you’ve borrowed. Your credit history represents about 15% of your credit score, so it can help to keep old accounts open, even if you’re not currently using them.
Also, if you choose to close an old credit card account or existing line of credit, it may increase your credit utilization rate. Meaning that you now have less access to credit and thus negatively impacting your score in the short term.
So for the time being, it may be worth keeping those old accounts open while you need to boost your score over the next few months.
Keeping your credit utilization rate low will be one of the easiest ways to improve your credit score.
Your credit utilization rate is how much debt you are taking on as a comparison to your total credit available to you.So for example – if you have a credit card with a $2,000 balance but your credit limit on the card is $10,000 – your credit utilization rate would be 20%.
Keeping this on the low end will prove to the credit bureaus that you are not over extending yourself.
You can keep this rate low by continually paying off your balance before the statement date posts for the following month before the company reports your balances to the credit bureaus OR paying off your credit card multiple times per month to keep the balance low.
I always encourage individuals to review their credit score every couple of months for purposes of protecting their identity and ensuring that their credit report continues to be accurate.
Checking your credit score often will be one way to get peace of mind that no one else has taken your personal information and used it to take on debt in your name.
It sounds outrageous, but sadly it happens more than you know.
With that said, first review your credit score and make sure that all of the reports noted are accurate. If you found a mistake, take the following steps to dispute it.
Going forward, review it periodically to ensure that it remains accurate and that your personal credit score remains intact and untouched by others.
Your credit score will follow you throughout your financial life which is why it is so important to continue to keep it top of mind.
Improving your credit score quickly may be a challenge, but it’s not impossible. If you’re just beginning to build credit or trying to rebuild your credit, it will be a process. But informed with the five credit tips above, some discipline and patience, you’ll be off and on your way to a higher credit score and all the financial benefits that come along with it.
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