You probably know your credit score and how it affects the interest rate you get on a mortgage or car loan. But did you know it could also affect your employment options? Building good credit takes work but it can be done. Continue reading to find out the five things you can do to build a healthy credit score as well as how to avoid some pitfalls that can hurt your score.
There are certain things everyone buys; groceries for lunch and dinner, gas to get you back and forth to work, even a toy or two for the kids, but instead of paying cash or using a debit card for all these little expenses, some of you are using a credit card. If you payoff your bill every month it's not a big deal. But what happens when all these start adding up faster than you thought and you start carrying a credit card balance every month? Before you know it you could be incurring interests and fees, which will add to your overall debt; and if you are not careful you could miss a credit card payment here and there and then your financial health is at risk.
Why should you worry so much about missing a payment every now and then or even over extending yourself by financing things you don't actually need? It's simple, credit is a big part of your financial identity and it's healthiness is defined by what's called a credit score. Your credit score is a number, the most common being known as a FICO score. It helps to evaluate how much of a risk it is to lend you money. It show how responsible or irresponsible you are with your finance. When it's good it can help get you access to lower rates which enable you to borrow for both short term emergencies and longer term bigger ticket items. That's why slacking on your bills or doing anything else that can negatively affect your credit is not a wise move. In fact, it can damage your future ability to borrow money. So, while you may still be able to get the things you need, like a home mortgage or a car loan or even something small like a new cell phone contract, it could cost you even more in the long run. Thats because you will likely be charged a higher interest rate.
Bad credit can affect you in areas of your life you wouldn't even expect; take employers and landlords for example, they may look at your credit score to see if you would be a responsible employee or tenant. Some car insurance companies may also see a direct relationship between your credit score and the likelihood of you being in an accident; and in certain states, this means you are charged alot more for insurance.
How do you build a good credit score or protect what you have already built?
In general, there are five things you should know. Some weigh a little more heavily than others.
First and foremost is your payment history, this goes for all of your bills. All of them, not just your credit cards. This one's a "biggie". This makes up a decent portion of your overall score. Creditors want to know that you pay on time, everytime, even if it's just the minimum. Consistency goes a long way. So pay your bills when they are due and never skip payments. One easy way to stay on top of things to setup automatic payment for your fixed costs like mortgage, gas and electric.
The second most important factor is how much you owe. Simply stated, its the amount of debt you have compared to the amount of credit thats available to you. It's a good rule of thumb to keep your debt lower than the overall credit available, the lower the better. If you get too close to your limit, creditors may think you are biting off more than you can chew or that you are supllementing your income with credit. Whenever possible, keep your debt to credit ratio as low as possible.
Thirdly, creditors want to see that you have been managing credit for a long time. Your credit history shows how long you have been using credit, how you have handled that responsibility and how responsible you have been. Establishing a good long history means you are an old pro at borrowing and managing money and are likely to repay what you borrow.
Fourth, your score can also be affected by the mix of credit types you have. A good mix will include different types of credit; from a mortgage to credit cards, to installment loans like car or personal loan payments which are repaid over time and can help you improve your overall score. This is because it proves you have experience handling a variety of account types instead of having alot of accounts in just one area. And when it comes to balances, lower is always better for your score.
Lastly, creditors want to know what you've been up to lately. They'll look at recently opened accounts and where you are inquiring about credit. Even if you are relatively new to credit or just thinking about borrowing they want to see who gave you credit and when. Also, applying for too much credit can be seen as high risk because it looks like you're desparate for loans. Take department stores, for instance, doesn't it seem like they are always offerring you 10% off if you open up a credit card? Although it could save you some cash right there at the register, think about the possible long term consequences of opening and paying for yet another account.
So, now that you know what makes up your credit score, it's important to check your credit reports, because thats how your score is established in the first place. There are three national credit reporting bureaus that you should know, Experian, Transunion and a Equifax and you are entitle to a free credit report from each of them every year. Which you can request from annualcreditreport.com. You should know that only the reports themselves are free and that there is a fee to get your actual credit score. Also, be sure you check your credit reports for accuracy and take care of any problems ASAP. You don't want any skeletons in your credit closet.
In the end, the best things you can do to keep your credit score healthy is; pay your bills on time and limit your debt payments to less than 20% of your income. Also, be careful not to exceed account limits and make sure none of your accounts are delinquent, because getting an account turned over to a collection agency is a credit score killer that you want to avoid at all costs. If you take these steps, you can achieve a higher healthier credit score, and that's something that money just can't buy.
Check out these articles on credit report and score:
All About your Credit Score
How to check your Credit Report and Score for free
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