Your credit score is one crucial component of your financial journey in life. It also plays a significant role in your pursuit of your long-term financial goals. You also have to factor this in as you try and manage your debt payments. These and a lot more financial situations only underscore the importance of your score.
As you try and manage your finances, you will come across the need to either improve or maintain your score. If you have a less than stellar financial history then this would reflect badly on your score. You need to then improve and raise it to a decent score. On the other hand, you just need to maintain your score if you have been doing the opposite.
Valuepenguin.com shares that the average credit score of Americans in 2015 was about 695. This has been on a slow and steady increase from 2011. It has been going up by one to two points year on year. This could mean that consumers are starting to understand the importance of keeping a tight ship in terms of their finances. It is also a sign that after the recent recession in 2008, people are slowly picking themselves back up.
In all these, your credit score is a big factor that affects most of your financial decisions in life. If you are trying to get a mortgage or car loan approved with a bank, your score will come up as one factor they will consider. If you are trying to get a new credit card, your score will be one of the factors that will dictate your interest rate.
By now, you already have an idea how important your score is. Here are a few habits that you need to look into to help you improve or maintain your credit score.
Paying bills on time can help your credit score
Your payment history plays a crucial role in the way your score is computed. It also forms part of the very foundation of your financial habits. There are a lot of factors that goes into play when you talk about on-time payment. There are people that are able but just forgets to send in a payment. Some people just doesn’t feel like making a payment. Then there are those who have fallen on hard times and are unable to make payments.
For people who are going through a difficult situation, there are ways to address the issue. You can talk to your lender and work out a repayment plan. However, for those that are financially able and yet manages to miss their payments, there is something wrong. If you are one of these people then you need to make some changes fast.
If you are missing your payment because there are just too many to monitor then look into debt consolidation. This can help you manage and ensure that you are able to pay your financial obligations on time. You can also explore auto-payment services by your lenders. If not then you can simply set up alerts on your phone or in your paper calendar.
Be mindful of your credit utilization ratio
This is another important aspect of your credit score that you need to be aware of. This refers to the amount of credit that you use in relation to your limit. If you have a $10,000 credit limit and you have used up $2,000, then your credit utilization ratio is at 20%. The idea with this ratio on why it is computed is that lenders want to see you use as little credit as possible.
MyFICO.com explains that using a high percentage of available credit could make lenders think that you are overextending your finances. As such, this can lead to delayed or even missed payments. This is a double black eye for your credit score. It would dip due to high credit utilization ratio and from missed payments.
The best thing to do is be mindful of your spending when using your credit card. You can make weekly or bi-weekly payments to help you manage your cost and bring down the ratio. You need to make sure as well that you are able to pay off your balance at the end of each month. This ensures that what gets reported at the end of the month are paid off purchases.
Take note of credit card applications
One of the financial pitfalls you could encounter at the start of the year is your score dipping due to excessive credit card applications. You need to understand that as you apply for credit cards, there will be a lot of inquiries on your score. Multiple inquiries in a short amount of time can have a negative effect on your score.
You also need to be mindful of these inquiries, especially with the hard inquiries. These are the ones that can cause your score to dip a few points and usually stays on your report for a couple of years. What you can do is to apply sparingly or only when you need to. If you are lucky or doing great with your finances, the bank might just give you a pre-approved card without having to apply for one.
Keep your needs in mind
As you rave about the rewards program of your card, you need to make sure that it is something that fits into your lifestyle. If you often travel by land because of work or with your family, using a card that rewards you for gas purchases would be a good idea. The same logic applies if you have a big family and your grocery budget every week is quite substantial. Using a card that rewards you for grocery purchases would be a good bet.
The reason this helps you out with your credit score is that the more rewards you get out of a card, the better you manage your payments. This is just a cause and effect on how great benefits makes you more aware of your payments. As you use the card, you become more conscious of paying your balance down because you know you will need to use it again.
Monitor your credit report
You need to be proactive as well in managing your credit score. What this means is that you should not wait for the time that you have to make changes. Monitor your credit report so you have an idea how your score is coming along. This also gives you the chance to correct any errors on your score. There might be erroneous entries showing unpaid balances when in fact, you already paid them off. The FTC.gov shares that the Fair Credit Reporting Act (FCRA) allows you to get one free copy of your credit report from nationwide credit reporting companies every 12 months.
As you monitor your report, you are able to manage your expectations when it comes to your score. You know the details behind it. You also see the areas where you can make improvements. Are there any unpaid or late payments holding your score down? Understanding your report gives you a glimpse of the factors that are affecting your score.
Your credit score can greatly influence the way you manage your financial goals in life. It can play a hand in determining your interest rate. Your score can also give lenders a glimpse of how you behave financially with just three numbers in front of them. This makes it all the more important to manage and keep on improving on your score.