Upon reaching adulthood, one number that can dramatically impact your life, both financially and otherwise, is your credit score. A good score can help you receive the loans you need and ultimately pay less interest on those loans. But it can also help when applying to lease an apartment, and some employers even check your score before hiring.
While a good credit score is to be desired, it isn’t always easy to obtain. Life throws everyone curve balls that knock their financial plans and budgets off track. So how do you build and maintain the high credit score you desire? Below are seven habits commonly found among those with high credit scores.
1) Maintain Low or $0 Credit Card Debt
Credit cards are one of the most convenient payment methods today. The ability to “buy now, pay later” helps with financial emergencies as well as everyday cash flow. But it’s that convenience that also makes credit cards one of the easiest financial tools to abuse. Consequently, credit cards also play a significant role in your credit score.
Ideally, you should repay your entire credit card balance each month. If you cannot accomplish this feat, try to maintain a relatively low balance. Doing so will help you avoid paying costly interest expenses and help improve your credit score.
2) Only Borrow When Necessary
Loan and credit card offers are all around you - from your mailbox and inbox to TV and the internet. While it may be hard to avoid seeing these offers, you can control whether you take advantage of them or not. Just because you qualify for a loan or new credit card doesn’t mean you should apply. Instead, only apply for new credit when it’s necessary.
3) Check Your Credit Report & Score Regularly
Thanks to many free apps and websites, it’s easier than ever to check your credit score today. But your credit score by itself shows only half the picture. While monitoring your credit score regularly helps you know where you stand and learn how your financial actions impact your score, it can be limiting.
For example, if you check your score and see it’s high, you may stop there. After all, a great credit score must translate to an accurate credit report, right? Not always. Errors do occur, and fraudulent accounts may take time to show up or impact your credit score. You should always monitor your credit score and report.
Each year you’re able to obtain a free copy of your credit report from the three major credit bureaus (Experian, TransUnion, and Equifax) at www.AnnualCreditReport.com.
4) Strive for a Low Credit Utilization Ratio.
Your Credit Utilization Ratio, or CUR, is a figure used by lenders to determine how well you manage credit. Your CUR is calculated by dividing your total credit card balances by your total credit limits and multiplying that number by 100.
For example, if you have a credit card with a $10,000 limit and your balance is $4,500, your CUR would be 45%. Lenders like to see this number below 25%. Excellent credit scores often have CURs below 7%.
5) Follow a Budget.
Everyone should follow a monthly budget. It’s one of the best ways to organize your finances and save for goals, such as retirement or a new home. Additionally, budgeting can play a significant role in maintaining and building your credit score.
Payment history makes up the largest component of a credit score. Following a budget helps to ensure you have the funds available to make your loan payments and other financial obligations on time. Failing to do so will cause a drop in your score, and late or missed payments can remain on your credit report for up to seven years.
6) Build an Emergency Fund.
While budgeting is a great way to guarantee you meet all your existing financial obligations, sometimes unexpected expenses pop up. That’s why saving a portion of your monthly income in an emergency fund is essential. Should unforeseen costs arise, such as medical expenses or car repairs, you’ll be able to rely on those funds instead of borrowing more money and potentially lowering your credit score.
Work to build an emergency fund between three to six months’ worth of your living expenses. While this may seem significant, should something dramatic happen, such as a job loss, you’ll be prepared.
7) Live Within Your Means.
Credit cards make it easy to spend – even when you know you don’t have the money to repay the balance quickly. While this can add up, cause financial stress, and lower your credit score, it’s not the only way people live outside their means.
When applying for loans, such as home or car loans, you will be approved for a specific amount. Just because you’re approved for that amount does not mean you need to borrow all of it. Excess spending on homes and vehicles is an easy trap to fall into – upon seeing the max amount to borrow, people often feel they need to spend that amount.
We’re Here to Help!
Building an excellent credit score doesn’t happen overnight. It requires ongoing effort and dedication. However, its impact can be significant when it comes to receiving loans and determining how much you will pay for those funds.
If you’re interested in learning more ways to build your credit, such as through debt consolidation, we’re ready to help. Please give us a call to get started today.