Credit is an essential part of our financial lives, and here’s the reason why. It’s not always the case where the amount of money going out matches the amount of money coming in. Now if you are in a situation where you have built up a healthy pot of savings, you are in a place where you can sustain this imbalance for a certain amount of time. I stress a certain amount of time as this imbalance cannot continue indefinitely. This is where credit comes into play, for those who are not fortunate enough to have a savings buffer.
Credit can provide a cushion for times when you are spending more than you are earning. There could be a couple of reasons for spending more than earning, loss of a job or emergency expenditures.
Credit is also useful if you want to make large purchases such as a house, car, appliances, furniture and so on. Credit lets you buy these items even if you don’t have the money to buy them. The catch is that you have to pay back the principal with interest. The amount of interest you pay is determined by your credit score. The higher the credit score the less risky you are to the lenders and the lower the interest you pay on credit.
Managing your credit responsibly can help you increase your credit score over time. Your credit score sums up in one number your ability to pay your loans. Suffice it to say that our credit score plays a very important role in our financial lives. The surprising part of your credit score is how few of us actually know our credit score. We should be aware of our credit score at all times considering how easy it is to get this information. Simply go to any of the credit rating agencies, like TransUnion, Experian, or Equifax and obtain your credit score. There is a fee for this service but I believe it is worth it. The benefit of knowing your credit score outweighs the cost.
How to Improve your Credit Score
So the obvious question is how do I increase my credit score? There are mainly four ways you can do this.
1. Pay your debt on time.
Creditors want to see your debt repayment history. They want to see your ability and willingness to repay debt. Missing payments can hurt your credit score over time. So always pay your regular repayments.
2. Beware of your Credit Utilization Ratio
So this means that if you have credit cards with combined limit of $20,000 for example, don’t use more than 25% of your credit limit, the lower the credit utilization ratio the better. Whatever your limit, do not max out your credit. This is an indication to creditors that you have financial difficulties that is causing you to use all of your credit limit. Reducing your monthly balance could mean reducing your expenses which could be difficult but keep in mind the benefits of improving your credit score, lower interest rates.
3. Age of Accounts Matters
Keep your credit card accounts open for as long as possible. The age of your accounts is a factor in determining your credit limit. This is due to the fact that the age of your credit history shows your ability to manage credit. The longer credit history can help show that you are low risk if you have not had financial difficulties.
4. New Credit Applications
Your credit score takes into consideration how many credit applications you have made recently. The reasoning behind is that if you have made an increased number of applications recently indicates that you may be in financial difficulty.
If you do not own a home or have a car loan, your credit score will mainly be based on credit cards. If you do have larger loans such as a mortgage or a car loan, then make sure you make these payments on time as missing these payments can destroy your credit score not to mention the risk of losing your home.
Keep in mind that there are several factors that come into play to determine your credit score and you should be mindful of these factors. Check your credit score on a regular basis, don’t obsess over it but be aware of it. It is better to know your credit score before applying for credit than getting a surprise. Also, check your credit report while you are looking at your credit score, they are not the same.
A credit score is a number while a credit report is a report of your history of bill payments, accounts open, personal information, accounts in arrears, and recent credit inquiries among other information. It is important to check your credit report to identify any mistakes on the report. Mistakes do happen and if not corrected can affect your ability to obtain credit.