Almost every US citizen knows her or his Social Security number by heart, even if it’s a meaningless series of digits. But too few of us know our credit scores. And unlike an SSN, your credit score has a profound effect on your finances and future.
Credit scores are notoriously fickle things. Yet they can affect major areas of your life, including housing, employment, and even relationships. A clean credit score can make an enormous difference, so it’s a number worth maintaining. Luckily, there are some things you can do to increase your credit score and keep your interest rates low for life.
First, it’s worthwhile to dispel some misconceptions. Contrary to some advice out there, plenty of good financial behaviors don’t change your credit score. Paying your monthly utility bills on time won’t benefit your score. But paying these items late—or not at all—will bring your score down. Another misconception about credit scores is that no history of late or bad payments is a good thing. While it seems unfair, everyone begins their financial lives with a low score.
So how does a consumer make his or her score go up? Here are a few tips:
Borrow from a Lender
This seems obvious, but the best way to establish credit is to . . . establish credit. It’s not rocket science: borrow money from a bank or lender, even if you have to begin with a very small amount and pay a higher interest rate than you had hoped. Try for an auto loan or a credit card. The number of accounts and the length of time you hold them both affect your credit score. And unlike with utilities, making payments on time is a boost.
Secured credit cards are one of the best ways to establish credit for people without any pre-existing credit. Essentially, these are cards for which you pay a cash deposit first. The cash acts as collateral, literally putting your money where your mouth is in terms of showing you’re a reliable consumer. After a period of good behavior, your credit limit will increase, along with your score.
Responsibly Using Credit Cards
Once you’ve established enough credit to be accepted for a card offer, you need to make sure and use the card responsibly. This means paying your bills on time and keeping an eye on your Credit Utilization Rate, which is the amount you’ve borrowed compared to your borrowing limit. It’s best to keep this number low, ideally less than 20%. According to Experian, credit utilization is one of the most impactful factors in your credit score, so watch your utilization ratio closely.
Credit scores don’t leap overnight, but given enough time and good credit behavior, your financial future will be bright. For help managing your credit card debt and increasing your score, contact Americor today.