This month, in celebration of National Credit Education Month, we’re providing you with a few helpful tips on how to manage your credit! Discover insights around why good credit is so important for your current and future financial journey.
When it comes to credit, there are a few key things you need to know. One, is that your credit score is a direct result of the information contained on your credit report. Two, there are multiple factors that impact your score, such as your payment history, the amounts you owe, the type of credit you use, etc. – these factors all drive your overall credit score. The good news is, that you as the borrower, control what your credit is going to look like! Half the battle is knowing the right moves to make that will positively impact your credit score. Here are few tips to help:
1. What impacts your score: The two main factors that are going to drive your credit score are your payment history and your amounts owed. So, our advice to you is… to the best of your ability, make your payments on time. If you’re in a position where you are catching yourself maybe falling behind, the last thing you want to do is not do anything. Contact your lenders and ask for help. We know it sounds easier said than done, be we promise you, more often than not, lenders are going to want to work with you versus letting the debt go unpaid.
When it comes to your amounts owed, we always like to say that this is a little of a catch-22. Why is that? Well… let’s talk about credit cards. Traditionally, we get approved for a credit card and get approved for a certain limit. Naturally, one would think “hey, I have a $2,000 limit, I should be able to use that full limit right?” And our answer to you is …WRONG! The reason for that is because, the moment you go above that 50% limit mark, for the credit bureaus, you are raising some red flags as now, you are using too much of your credit (hence the catch-22). Sadly, it doesn’t matter if you pay it on time, or that you use and pay month to month, if you remain above that 50% limit, you are going to continuously negatively impact your score, simply because of the outstanding balance. Our advice to you, try to stay below that 50% mark (again, we’re talking about credit cards only here).
2. Why is a good credit score so important? Credit scores are important because they are used for much more than just getting approved for a loan. Yup, you read that right! Your credit score can impact the amount that you may pay for car insurance, the amount of down payment you’ll need to turn on utilities, buy a car or a home, and of course… your credit score impacts the interest rate that you’re going to pay for that loan you’re applying for. Which is why we always say, the higher the credit score, the less it may cost you to get one or all of the above services and vice versa.
Now keep in mind that credit scores are calculated differently for each credit bureau, yes there are more than one (Equifax, Transunion, Experian), but overall, you want to aim at having a credit score of at least 680. The reason for this is because once again, the higher the credit the lower the rate (which is ideally what you want to aim for). We mention this because, as much as you may want to be at that 800 score, which is indeed a great goal, you are still in a good place at that 680 and above mark.
3. Check Your Credit Report: Finally, now that we’ve talked about what impacts your credit and what score to aim for, it’s important that you make it a habit to check your credit regularly. You can do so, by requesting your credit report from AnnualCreditReport.com. Normally, AnnualCreditReport.com allows consumers to pull their credit report once free annually, but as a result of COVID-19 they’re allowing folks to pull their credit report once free weekly. Requesting your free report does not provide you with your credit score, but you can choose to pay to see the score if you would like. We usually recommend using AnnualCreditReport.com to see your report, and then perhaps leverage other resources such as your financial institutions “FICO” score feature. You can also use providers like Credit Karma or Credit Sesame, just note that since these reports are free, they may have a delay in the data that is being reported. Ideally what you want to make sure you’re looking for is that payments are reporting correctly and that you don’t have anything reporting, that isn’t supposed to be there.
We hope these tips help you take and/or stay in control of your credit. For additional tips or for more information, we invite you to join us for an Understanding your Credit Live Webinar where we dive a little deeper into some of the topics featured here. In addition, if after you pull your credit report, you would like some help further understanding it, we encourage you to attend our Partners Financial Lab, where we will review a credit report section by section, making you a near expert at reading your credit report.