Creditworthiness is defined by a three-digit credit score and could be the key to a healthy financial life. Good credit is a determining factor when it comes to getting a mortgage, car loan, student loan or low interest credit card. Credit can also affect utility costs, insurance rates, rent demands, and even your ability to land the job you want. A low credit score will make it harder to do any of these things and could potentially cause stress in your life.
The best plan is to never get upside down with your credit in the first place; however, in the unfortunate event that does occur, there are proven strategies to help fix your credit. Below are several suggestions for improving or maintaining a positive credit score.
1. Get a low-interest, no-fee credit card: A great way to build a good credit score is to get a credit card that offers a low fixed interest rate and doesn’t bombard you with fees. Champion Credit Union offers a credit card with a low, fixed rate and no balance transfer or overlimit fees. Don’t apply to the first credit card company you find on a Google search or who solicits you in the mail. Do your research and be sure to partner with an institution that works for you and your lifestyle.
2. Check your credit report: These days it’s easy to get your credit score, but every once in a while you should print out and evaluate your entire credit report to see what works for or against you. Factors that contribute to a higher score include a history of on-time payments, low balances on your credit cards, a mix of different types of loans and credit cards, older credit accounts, and minimum requests for a new credit. On the other hand, late or missed payments, high credit card balances, collections and judgments are the main detractors of the score. The quick fixes are to pay off the revolving credit, remove the inaccuracies, and become an authorized user on someone else’s credit card account.
3. Understand the FICO score: Over 90% of lenders use the FICO credit score, which is based on the following five factors:
With that in mind, try to make all payments on time and avoid late fees at all costs, as payment history is number one on the list. Plus, create systems to help you stay on track, like automating bills with direct withdrawals, setting reminders on your phone, or creating a filing/calendar system. Some people have bills written with a credit card and then pay off the credit card each month.
4. Maintain 30% or less credit utilization: This is the part of your credit limit that you are using at any given time. There are two main ways to help with the use of credit. The easiest way is to pay your credit card balance in full each month. If that’s not possible, try to keep your total outstanding balance to 30% or less of your total credit limit. A second useful tactic is to request a credit limit increase, as long as your purchases do not increase simultaneously. With online access to your credit card account, requesting a higher limit can be done in minutes.
5. Work to keep old accounts open: Do you remember that credit card you got in college? Don’t close it. The age of your line of credit contributes greatly to your overall credit score. Keep old accounts open, even if they’re paid and you don’t plan to use them. It is unwise to close accounts with zero balances when you have other cards with remaining balances. This negatively affects your credit utilization rate. Also, if you have overdue accounts, try to fix the issues rather than closing them completely.
6. Consider consolidating your debts: If you have several outstanding debts, it could be advantageous to take out a debt consolidation loan from a bank or credit union. Then you only have to focus on one payment and more than likely you can find a debt consolidation loan with a low interest rate. A similar tactic is to transfer balances from high-balance, variable-rate credit cards to a lower-rate credit card. Credit card companies often offer promotions such as 12 to 18 months of low or no interest on the amount transferred.
Building good credit or fixing a poor credit rating won’t happen overnight, but if you follow these suggestions faithfully, you will see significant improvements. Putting in the work is worth it. Finally, if you have young people in your life, teach them these skills when they are teenagers so they can enter adulthood with healthy lines of credit.