Credit scores have become one of the most important factors in today’s financial environment. Credit impacts: the amount you can borrow; if businesses will lend you money; how much it will cost you to borrow that money; the cost of homeowners and car insurance; and it may even affect your ability to become employed. For example, in conventional mortgage lending, these fees may range from 0 to 3.25% of the loan amount. So, for a $200,000 loan amount at 3.25%, the fee would be $6,500. Good credit means freedom to choose lenders, lower fees, multiple credit card offers and lower insurance rates and fees. Maintaining your credit rating is also very important. If your credit score drops, businesses may increase fees or close credit lines. Either way, everyone should be spending time using the techniques below to manage their credit.
Ways to manage your credit score:
- Pay all bills on time and before the due date. The best way to consistently help your credit score is to pay all your bills on time. Paying bills, such as utilities, credit cards, etc. by the due date may be difficult, but it is extremely important and is a great indicator that other more important credit payments will be made on-time. Cash flow can be challenging, but planning ahead and setting aside money to pay the bills will help you manage this and avoid costly late payment fees and finance charges.
- Keep balances low by paying off as much of the balance as possible. The second best way to improve your credit rating is to keep balances low compared to the credit limit, also known as your utilization rate. In general, if your monthly balance is 30% or less of the limit, it looks more favorable to the credit agencies.
- Keep old unused credit accounts open, if they have a positive history. This decreases the utilization rate, also known as balance to limit ratio. Even though you may not be using the account(s), holding it open keeps your credit score higher.
- Multiple credit cards with balances is good. Contrary to belief, people with high credit scores are not debt-free. But, they manage their accounts responsibly, even if they have had mistakes at times. Per a recent FICO report, “they hold an average of seven credit cards, four with balances. The average account is 11 years old, the oldest credit account on file was opened an average of 25 years prior, and the most recent credit account is an average of 28 months old. Some 58% of high achievers did not open an account in the prior year, and 26% opened only one new account.”
- SPECIAL TRICK – Paying off as much of the balance before the statement closing date. If possible, five days before each credit card closing date, payoff as much of the balance as possible. When the balance is reported to the three credit agencies(Experian, Transunion and Equifax), it will be lower than the amount you actually spent and thereby lowering the utilization rate.
- Request a current credit report and dispute inaccurate information. It may take months for items to be removed from the report, so immediately dispute, keep meticulous notes and keep checking to confirm it was removed. It may be worthwhile to pay for a new credit report every couple months in this case.
- Avoid applying for credit too often. If you plan to buy a car or home, multiple inquiries in a 30 day period will be counted as 1 inquiry by the credit bureaus. Each time you apply for a credit card or loan, the creditor requests a current report from one of many reporting companies. They then review your credit score, payment history, balances, etc. These inquiries remain on your report for up to two years, the credit score will probably be lower, will look damaging for the first year, and alert potential lenders of possible lending risks, whether it exists or not. After you have purchased your home or bought a car, at a time when a drop in your credit score matters less, then apply for a new credit card(s). Or, apply for new credit after 6 months, so as not to adversely impact your score.
- Explore all options and resources before bankruptcy or foreclosure. These are devastating to your credit score. Reach out to creditors to negotiate better rates or terms or ask for temporary reduced payments or loan modification, etc.
- Pay by cash, debit card or check when possible. Even though you have credit cards and other loans, it looks much better to the credit bureaus and lenders if you do not need to use them.
- Getting married? Since the divorce rate is 50%+, you might consider adding your spouse as an authorized user or as an additional cardholder. If you separate or get a divorce, it will be easier to remove the spouse, without requiring to close the account and keeping your score higher.
- Be careful co-signing on a loan. Avoid co-signing on another person’s loan, as it may lead to missed payments or default. Lending money to relatives can be very risky. Unless you are prepared to help make the payments if the primary borrower can’t, then be very careful.
Managing your credit takes time and effort, but the rewards are lower expense and financial freedom.