7 Steps for Managing Your Personal Credit
Your personal credit dictates more than your ability to get low interest on your mortgage and credit cards. It also affects how banks view your business when considering funding options.
Your credit score probably falls somewhere between 300 and 800. Whether it's on the lower end of that range or somewhere in the 700s, there's room for improvement. Why does it matter? Lenders, landlords, and potential employers all use credit histories to determine whether a person is trustworthy. It's possible to be a hard worker with a valuable set of skills and still not get hired because of mistakes in your financial history. Rather than moving forward with a less than perfect credit score, learn the top tips from experts about managing your personal credit.
One: Pay All Bills on Time
This is the best-case scenario and making payments on time should be your goal. This is especially true for your mortgage. Most bills won't be reported to the credit bureau until they are a month late, but late mortgage payments have a significant impact on your credit score. As far as other bills go, this is a good time to establish the habit of making payments on-time.
Two: Pay Down Your Debts
In addition to improving your credit score, you could enjoy the freedom of being debt-free. If you're like many Americans, you probably have more than one type of debt, not counting your mortgage. These include auto loans, school loans, credit cards, medical bills, tax debts, and personal loans. There are several debt reduction methods you should not use. These include debt consolidation, loans from your 401(k), and home equity loans.
Rather than falling for one of these risky strategies, consider using the debt snowball method. There are many online tools and resources to help you work through your debt. The snowball method begins with a list of your debts from the lowest to the highest amounts. Next, plan to make minimum payments for each debt except the lowest one. Put as much of your money toward this debt as you can. When that debt has been paid off, roll the payments into the next highest debt.
Three: Don't Max Out Your Credit Cards
One of the ways that credit bureaus determine your rating is by comparing your credit limit with the amount of credit you've utilized. A high credit utilization ratio brings your score down. Avoid this situation by only using a percentage of your limit. A good goal is to use less than 30 percent of your available credit. Improve your score even more by getting your credit utilization down below 10 percent.
Why is this important? When potential lenders look at your available credit and they see that you have used a lot of it, they'll determine that you don't have a lot of funds and that you can't repay any new loans. As you bring your revolving debt percentage down, you'll see steady improvements in your credit score. This success can inspire more success in other areas of your personal credit management.
Four: Don't Apply for More Credit
One of the biggest mistakes consumers make when trying to improve their credit history is to apply for new credit cards or in-store cards. Any application for credit makes you look short of cash and desperate for more. Naturally, the additional debt narrows the gap between your available money and the percentage tied up in debt repayment.
Every inquiry for credit, even if you don't end up taking out a new loan, negatively impacts your credit score. Sometimes, consumers get approved for an additional credit card to improve their debt to credit ratio, but this is a risky maneuver. You'll be better off bringing the balance of your credit cards down.
Five: Research Credit Improvement Services
Some of the credit bureaus offer features that help you improve your score by connecting other financial information to the report. For example, if you can connect your bank balance or your consistent history of paying utility bills to your credit report, the additional information could boost your score. This is a good tactic to use if you don't have much of a credit history at all.
Six: Reduce Expenses
It is easy to get into the trap of comparing yourself and your lifestyle with those around you. This comparison often leads to purchases of new cars or TVs or furnishings for your home. Unless you can pay cash for these purchases, however, you're going to hurt your credit score. One of the best ways to improve your personal credit management is to rein in your monthly spending.
When you sign up for magazine subscriptions, cable TV, lawn care services, and online gaming, your overall budget takes a serious hit. Carefully look through your monthly expenditures and cut out those things you don't need. As you bring your monthly costs down, you can put more toward your debts and watch as your score begins to climb.
Seven: Keep Your Credit Cards Open
Once you get a credit card paid down, don't close it. By keeping it open, you improve your credit utilization ratio. Just be sure not to use the card to make more purchases. The same goes for old debts. Did you pay off your student loans? Have you finished paying for a car? If you had a positive history of making payments on those debts, then leaving the evidence of those timely payments will help your credit score. If you had some bad debts, however, such as repossessions or bankruptcies, they will be automatically removed when they hit the seven- to ten-year mark.
There are a lot of resources available to help you turn your credit score around. Be patient as you work through these seven steps. At first, your progress may seem slow, but over time, you'll begin to notice steady improvement.