Do you think about your credit? When I was younger it never crossed my mind. What it was, how to use it, why it might be important. Or, most importantly, how it might affect my future. I worked. I made money, I spent the money.
Eventually, as I grew up and moved out into my own place, the need for good credit became apparent. When I rented my first apartment or when I wanted to buy a new car I had to ask my parents for help. Thankfully, they had a good score and were able to help me. Despite this, it took me a long time to really understand my own credit and how to use it. I have also made it a point to share my struggles with my kids in hopes that they will start their journey much sooner than I did, and use it wisely.
Why You Need Good Credit
I totally get why your eyes glaze over and your ears start ringing when I mention the word credit. Who cares? Why does it matter to me? Talking about finances is awful. It can be confusing and downright boring. But if I can shake you a bit and maybe grab your attention let me explain why you should hear this.
Money. Plain and simple. Having more of it, having more freedom with it. The better your credit the more choices you have. It’s easier to borrow money, and you get lower interest rates on what you do borrow. You can even get better insurance rates. As well as access to the best credit cards with some great perks. In some cases, your new employer might pull your credit to see how responsible you look on paper.
For example, as a married woman who hasn’t had a job outside of the home for many years, the idea of something happening to my husband and leaving me unprepared is terrifying. I rely on him for all my monetary needs. He pays for our house, our food and our cars. If he passed away where would I be? I know that if I had no credit or credit cards in my name it would be much harder for me. If he died or left me, how would I buy a new car or qualify for a loan without my own credit score? So with his help, I have several cards in my name and my car loan is as well. It goes on my credit report and is completely separate from his.
Subsequently, after twenty years of marriage, I have a pretty good score and history.
What is Credit?
The Websters Dictionary definition is “2. The balance in a person’s favor on an account. c. the provision of money, goods, or services with the expectation of future payment.” Synonym: Trust. An easy definition is; the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
How does this help you? Well, now you know what you’re looking at.
What is Your Credit Score Made Of?
It’s important to understand how your score is calculated. Your FICO score is broken down into five areas.
- Payment history = 35%. Making payments on time is the most important aspect of youir score.
- Credit utilization = 30%. Having more availble credit than you use.
- Length of credit history = 15%. Having a long history of proper payments and credit.
- Credit mix = 10%. A varied range of credit. Some cards,some loans.
- Recent hard credit inquaries = 10%. Last is, how many times someone has checked your credit to offer you more.
The credit score ranges are;
Poor = 300-579 Fair = 580-669 Good = 670-739 Very Good = 740-799 Execelent = 800-850.
Undoubtedly, the better your score the more perks you have in getting the loans and credit cards you want.
Action! How Do You Increase It?
So, how do you fix a problem you have or raise your score? The first step is to get a copy of your credit report. Check for errors and misinformation. If there is any, write a letter to the credit agency in dispute of their information.
Next, pay any late payments or past dues as soon as possible. Remember this doesn’t clear them from your report but it starts the process. Another good way is to write a goodwill letter to the company and ask them to forgive your one-time late payment.
Moreover, if you want to increase your score and have no late payments there are a few things you can still do. First, you can ask for an increase in your current credit card spending limit. This will increase your debt ratio. This means you have more credit than you’re using. You could also open a new credit card. Make sure you use it a tiny bit but don’t go crazy and always pay it off at the end of the month.
Another way to help your score, without another inquiry, is to become an authorized user on someone else’s account. Like your parents. If they have good credit they can add you as a user on one of their cards and you don’t have to do anything.
Lastly, don’t open a ton of new accounts all at once. Spread it out. Don’t forget the hard inquiries can cause damage that you’re trying to improve.
Good credit is part of your financial power. The better you have the more you’ll be able to get. So get your credit report regularly and check it! There are also great resources online. Free classes on how to increase or fix it.
Check out these articles for more like this. Holiday Money Blues: 4 Tips to Get your Finances Back on Track, Money Fears: Face Them and Rewrite Your Money Story, https://www.experian.com/consumer-information/consumer-credit-education-for-lenders
The opinions expressed in this article are solely those of the writer and do not necessarily represent those of The We Spot, it’s employees, sponsors, or affiliates.