Whether you’re shopping for a new home or car, looking for credit cards or mortgages, or just trying to improve your personal finances, having a strong credit history is crucial.
A good credit score can help you save money in the long run, and a low debt-to-income ratio is one of the most important things lenders look at when deciding whether or not to extend credit to you.
Pay Your Bills on Time
A good credit history is crucial for strong personal finance, as it increases your chances of getting the best interest rates on loans and credit cards. Additionally, a higher score means you can qualify for better products and services, such as cellphones and apartments.
A key to maintaining a high credit score is making your payments on time. The payment history factor accounts for about a third of your overall credit score, and creditors want to see a record of responsible credit management.
Paying all your bills on time will help you avoid late fees and penalties, which can be a significant negative impact on your credit score. It also helps you prioritize essential spending and save money in the long run.
Charge Only What You Can Afford
There are a lot of credit card marketing adages out there, but one that stands out is “don’t charge more than you can afford to pay back.” Even with the best credit cards on the market, you shouldn’t let your balances go into the red. If you do, you may not be able to pay it off when the interest kicks in, and that can hurt your credit score.
This rule of thumb applies to any type of debt, whether it’s a credit card or mortgage. In fact, a credit card that can be used for multiple things can be a big help, especially if you’re trying to save up for a down payment or pay off a credit card debt. It also makes you less likely to overspend on something you don’t need, and you can use your credit wisely. The best credit cards offer a variety of features to make life easier, like cash back and travel rewards.
Maintain a Low Credit Utilization Rate
Having a low credit utilization rate is a good way to boost your credit score and strengthen your overall financial position. After payment history, your utilization ratio is the second most important factor in calculating your FICO or VantageScore.
Generally speaking, it’s best to keep your revolving balances below 30% of your total credit limit. That’s because lenders don’t like to see you using all your available credit – even if you pay off the debt in full each month.
One way to get your utilization rate down is to pay off your card balances as soon as you receive the statement, says Chad Kusner, CEO of credit rehabilitation company Credit Repair Resources. That’s because the date your issuer reports to the credit bureaus is what counts for your utilization rate, he says.
Another easy way to lower your utilization is to ask your credit card company for a higher credit limit. But make sure you’re using the new limit wisely, too – keeping your balances low is key to building strong credit and improving your scores.
Avoid New Lines of Credit
Credit is a crucial part of personal finance and a solid credit history can help you get the best rates on loans, insurance, rent and car purchases. But building and maintaining a strong credit history isn’t just about having a lot of lines of credit; it’s also about using your accounts responsibly.
A line of credit (LOC) is a type of revolving loan that lets you borrow money as needed up to a set limit. They differ from other types of financing, like personal loans and payday loans, in that you are not required to repay your funds immediately.
Your credit score is calculated based on a number of factors, including how much credit you use and your repayment history. Payment history accounts for about 65% of your credit score.
You may be tempted to open new lines of credit, but doing so could hurt your credit scores. Applying for a new line of credit generally results in a hard inquiry on your credit report, which can temporarily lower your credit scores by a few points.