When we think about our personal financial goals, it’s often with respect to the big picture. Maybe you have been putting money away for retirement since your parents helped you open your first checking account. Perhaps you’re saving up for your first house. Or maybe you’re even monitoring some of the “Up-and-Coming Cryptocurrencies You Should Consider Investing In” we discussed previously, hoping for lucrative long-term gains.
Regardless of what your plans for the future are though, it’s also important to adhere to some core strategies that will benefit you financially –– one of which is to maintain a solid credit score. If this is something you’re new to, or you haven’t ever given it a whole lot of thought, AskMoney.com’s introduction to credit scores provides the following ranges for assessing your score:
- 300 to 579 –– poor
- 580 to 669 –– fair
- 670 to 739 –– good
- 740 to 799 –– very good
- 800 to 850 –– excellent
Where you fall within these ranges will affect an assortment of financial events in your life. It will determine how easy it is for you to rent an apartment or buy a house, whether or not you can get a given deal on a car, and sometimes even how fit you are for a given job. This is why it’s important to consider the different ways you have of improving your score –– some of which we’ll cover below.
1. Consider Future Crises When Asking for a Loan
A CNBC.com article on American debt recently reported that the average family owes approximately $155,000 to financial institutions. The same article notes that rising prices are causing people to fall deeper into debt, which speaks to a common problem. Many will take on loans or use credit cards expecting that they’ll soon be in better financial standing, and able to pay off debts. But when prices rise and income doesn’t, it’s hard to actually reach that point. So, whenever you’re considering a large credit card purchase or loan that could affect your credit, be sure to carefully consider what could happen to your financial standing. A crisis like the pandemic and resulting economic inflation we’ve seen can affect your ability to pay down debts –– and long-standing or worsening debts can hurt your credit.
2. Don’t Use All of Your Credit
Sometimes we might be offered loans and credit cards with excellent interest rates. These additional sources of liquidity can be very helpful depending on their timing. The problem is that many people think they are free to spend as much of that money as they want, as long as they keep making their payments on time. But the truth is that the percentage of the credit you use can affect your score negatively.
The general rule of thumb for credit utilization (which you’ll find repeated all over the place) is to keep it under 30%. That’s not a bad number to go by, though experts quoted at The Washington Post –– including the vice president of scores and predictive analytics at FICO –– have pointed out that there’s nothing specific about the 30% number with regard to scoring. Staying under 30% will still generally keep you in good standing –– but if you’re aiming for a score in that “excellent” 800-850 range, single-digit utilization is recommended.
3. Get Higher Credit Limits
This may sound a bit like a “life hack” but it actually works. As we mentioned, using a low percentage of your credit strengthens your score. But if you can’t pay your debt right now, and you are in good standing with the bank, you can also ask for them to raise your credit limit (or the amount it’s possible to spend on your card). If you can get this increase, but keep your credit usage the same (meaning you don’t start spending more), your credit utilization (how much of the available credit you use) will be lower. This contributes to a strong credit score as well.
4. Diversify Your Credit
It’s easy enough to think of the idea of “credit” as pertaining only to your credit cards. In actuality though, a number of different things can factor in –– and an article on credit scores at NextAdvisor explains that having different types of credit shows lenders that you can handle multiple debts well. For instance, if you can pay off a car loan, manage a personal loan for remodeling your home, and stay up to date with more than one credit card, you’ll viewed as responsible (and worthy of a good credit score). Just remember to keep your credit usage low, or you could give off the opposite impression.
5. Start Early
Your credit score can also be heavily affected by how long your financial history is. Banks don’t just care about how much money you owe and how timely your payments are, but also how long you have been able to maintain this behavior. Starting with a simple loan or credit card when you are young and showing financial responsibility from that point on can go a long way. A longer credit history will also protect you in the sense that a single blip –– say, a big expense on your credit card that you can’t pay down immediately –– will hurt your score less.
Maintaining a good credit score is a crucial part of personal finance. And while it’s not always easy, it is something you can work your way toward. Following the tips and steps above will see you improving your score in time, and ultimately securing an enviable credit score.