by Brook Walsh
on Tuesday, November 13th, 2018 at 4:40pm.
Conversations about credit shouldn’t make you cringe, even if you have a poor or below average credit score. When used responsibly, credit is a financial asset that can simplify your life and improve your finances. There are actionable steps for rebuilding and maintaining a good credit score, and those steps begin with little more than a willingness to learn.
No one establishes a strong credit score passively or overnight. These achievers begin by forming intentional habits and learning the business of credit lending. They use their knowledge to seize the many benefits of credit without falling victim to its potential pitfalls.
This article aims to give you a head start on the road to excellent credit so that you can lay hold of those benefits too. Grab some scratch paper for notes. Let’s get to it.
1) Pay Off Your Debts As A Financial Investment
There’s no solution better for lowering your credit score than eliminating existing debt. But paying off loans will do one more thing that most of us don’t usually consider. Early debt payment is a lucrative financial investment. As one of Northern Michigan’s leading vacation home advisory firms, we hear the term “investment” tossed around often. We use it ourselves regularly, too. Real estate can be a lucrative addition to any investment portfolio. But for those with heavy debt over their heads, the best way to invest for the future is by paying off your existing financial obligations. No property, stock, or bond is going to match, in returns, the high interest that a creditor will charge for your outstanding credit balance. If you have money set aside for stocks or are saving for a certificate of deposit, put that money toward cutting down your debt first. By future proofing your investments and paying down debt now, you will be able to keep more money in your pocket instead of in the pocket of your lender.
2) Practice Payment Diligence
No matter your credit – whether it is a car loan, credit card, phone bill, or mortgage – missing payments pings negatively against your credit score. If you have a credit card, make sure you only put on the card what you can pay back within a few days. Don’t build up a large balance over the course of a month and then expect to pay it all back in one lump-sum. That’s where credit card companies make their money – it becomes too easy to let some of that balance carry over into the next month. Maintain a low balance, and pay off that balance more regularly than is required by your credit card provider. Their success is in your hard luck, but your success is in learning how to manage your credit card responsibly by paying it off regularly. Unfortunately, most monthly payments are only reported when they become delinquent transactions. In other words, you are not directly rewarded for excellent payment histories. Instead, your credit score is indirectly improved by minimizing missed payments, as opposed to being improved through excellent and consistent payments.
3) Understand Credit Ratios to Play Your (Credit) Cards Right
Many people assume that when they’ve paid off a credit card, they should immediately cancel that account to get rid of the possibility of accruing more debt again in the future. This is a bad decision if you intend to improve your credit score. Here is why: one of the factors credit lenders use to determine your score is the ratio you have of credit limit to credit spent. For example, let’s pretend you have two credit cards, each with a limit of $5,000. That’s $10,000 in total credit limit. If you manage to pay the balance off from one card, but the second credit card has a remaining debt of $2,500, then your ratio of limit to debt is 25%. That isn’t too bad. On the other hand, if you suddenly cancel the paid off credit card, your credit limit cuts in half, which makes your debt appear to credit lenders as a debt of 50%. The lower your limit to debt ratio, the better. Pay off your cards, but keep them open to make the most of your remaining balances.
4) Don’t Trust Your Credit Score Without Careful Examination
Debt mistakes and fraud are common, unfortunately. But knowing that they are common can help you look with skepticism at some of the factors that may be hurting your score.
Keep an eye out for transactions, late payments, or dollar amounts that don’t add up to your known spending. As soon as you see something that doesn’t match your records, call your credit bureau. It can take several weeks for them to check your claims, but the wait is worth your time if that mistake is hurting your score.
5) Equip Yourself for Financial Success
Debt is accrued through two primary factors: disaster and poor money management. One of the many great benefits of having a credit card is the ability to take care of those unexpected catastrophes when they arise. Where credit card companies make their big money is when disasters get way out of hand, or more typically, when we, as credit users, do not carefully manage our finances. If you are on a tight budget and don’t know where to begin learning about healthy financial management, begin by reading blogs and books. These are free or low-cost resources that offer near-endless insight that’ll help you manage your income and expenses responsibly.
There are also many awesome apps for your computer and phone that help you schedule and remember payments, build savings, and pay off debt. Mint might be a good place for you to start. Financial responsibility will help during disasters and alleviate debt that could otherwise grow through poor financial planning. In the long run, the best way to secure a good credit score is by remaining mindful of the money going in and out of your accounts.
6) Know the Difference Between Good and Bad Debt
This point might sound silly at first. As in, “Isn’t all debt bad?” Good debt can improve your credit score in the long run, even if there is a huge balance to pay off. The difference between good and bad debt has typically to do with collateral. A mortgage, in this case, would be considered a good debt. In the unfortunate situation that someone cannot pay back the loan for their home, that property can be taken back from them. On the other hand, a credit card is a bad debt because the purchases are so small and have often lost their worth by the time a creditor requests his payments.
While having a good credit score before homeownership is a sure way to save tens of thousands of dollars over the duration of your mortgage, you can also expect your mortgage to help your credit score substantially if you remain responsible and pay down the interest and principal monthly and on time.
7) A Few Final Things To Avoid When Trying To Improve Your Credit Score
As I alluded to earlier, those determining your credit score pay closer attention to your mistakes than to your responsibility. That means there are plenty of opportunities for simple mistakes that chop slowly away at your credit score, making it harder to improve if you are unaware of them. Here are a few simple things to avoid:
If you want to apply for several credit cards or loans, conduct those searches at once, as opposed to spreading them out over a long period of time. Applying for credit pings negatively against your score, but within the same day, these attempts can be considered only one.
Avoid late payments. Some rules deserve repeating.
Avoid minimum payments, when possible. Always try to pay everything off, or at least exceed the minimum payment by as much as you can afford.
Don’t forget to regularly check your credit score – you have two opportunities per year to check your score without that pinging negatively on your score.
Avoid going it alone. Never be afraid to ask someone for advice or pick up a good book or read a blog that can help you better understand your debt and finances. The more you know, the better you can prepare for the future.
Brook Walsh is from Northern Michigan and understands lifestyle based real estate investing which is one of the reasons he's chosen to pursue his dream of helping real estate investors with their home buying needs. Learn more about Brook or start your home search now.