Your credit history is your financial reputation. And
just like your professional and personal reputations, your credit history takes
many years to cultivate, can be easily damaged, and will follow you the rest of
your life.
Maintaining good credit is important.
Nearly everyone will need to borrow money from a lender at some point — say,
for buying a car — and your credit history determines whether you qualify
for a loan and, if you do, what interest rate you pay. It can make or break
your application for a credit card. A prospective landlord can check it to
judge whether you’ll be a responsible tenant. Potential employers may request
your credit reports to see if there are any red flags.
Luckily, many resources are available to
help you learn how to successfully establish — and maintain — a healthy
financial reputation. Here are three tips for creating a stable foundation for
good credit.
1. Monitor your credit reports.
Understanding your financial habits — such
as payment history and spending patterns — can help you improve them! Your
score is generally based on information in your credit reports. Mistakes
on your credit reports could hurt your credit score, so check
them regularly. Make sure to check that your reports don’t contain any errors,
such as incorrect contact information, closed accounts listed as open, or an
item like an unpaid debt listed twice.
If you find something wrong in a credit
report, you should contact both the credit reporting agency that produced it
and the creditor that provided the information.
2. Pay your bills on time.
This is one of the simplest ways to keep
your credit score strong — yet, with the bustle of everyday life, it can be
easy to lose track of time and miss payment deadlines. Set up auto-payments or electronic
reminders to
ensure that you won’t be hit with late-payment penalties. Paying bills late can
hurt your credit score, which in turn can raise your interest rate — meaning
that you’re out even more money.
It’s a common misconception that the best
way to improve a credit score is to pay off all of your accounts and close
them. Get up to speed on your payments and stay on schedule, but be careful when closing accounts.
Doing so eliminates some of the credit available to you, making balances appear
higher when compared with the combined credit limit of all of your accounts.
Also, if you managed an account well and made payments on time, closing it will
remove all the positive benefits of your responsible credit behavior on your
reports and score.
3. Don’t get close to your credit limit.
Credit scoring models look at how close
you are to being “maxed out,” so keep your balances low in proportion to your
overall credit. Experts
advise keeping your use of credit to no more than 30 percent of your total
credit limit. That
means that if you have $12,000 of available credit on one open account, you
shouldn’t use more than $3,600.
You can decrease your credit utilization
ratio over time by paying as much of your credit card balance as possible each
month. If you can, pay more than the minimum balance due; this will increase
your available credit and decrease your utilization ratio faster.
Just like a shining professional
reputation can take you far in your career, your credit score can make or break
your financial status. To learn more about how to establish a stellar financial
reputation, go to FinancialProtection.USA.gov.
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