Do you know how credit affects you? Many people believe that their credit score is only important when buying a home. While knowing your credit score is very important when home buying, consumers should be monitoring more frequently than just this occasion. Credit can affect you in many ways, especially during life’s milestones like setting up utilities, buying a car, landing a job, planning a wedding, getting a college degree, or growing your family.
To help you better understand credit and make informed decisions here are the dos and don’ts to help guide you.
- check your credit report regularly
- pay bills on time
- keep tabs on your account balances
- know the key elements that factor into a credit score
- exceed your credit limit
- ignore overdue bills
- borrow more than you can pay back
- believe myths about what impacts your credit score
Do check your credit report regularly
Tracking your credit score can help alert you to fraud or mistakes on your credit report, and prepare you for big-ticket purchases. You can request your credit report from each credit reporting agency at any time. Or use free tools such as Credit Tracker from Capital One. However, you are allowed one free report from each agency once a year.
Do pay bills on time
On-time payments will put you in good standing and establish a strong credit history. While skipping a payment might not seem like a big deal, your payment history is weighted heavily on most scoring models. A history of late payments — even those missed by a few days — can be damaging. If you are able to schedule automatic payments on your bills, take advantage of it.
Do keep tabs on your account balances
Even if your credit limit is high, avoid exceeding it or using it to its max. Make at least the minimum payment on your credit card each month and pay more than the minimum if you can. Credit scoring companies emphasize the debt utilization ratio (total debt as a percentage of all your available credit). Try to keep account balances below 30 percent of their limit, and the lower the better.
Do know the key elements that factor into a credit score
Accounts you have or had, credit limits, debt and payment history contribute to your credit report. All of this information is part of a formula that determines your credit score. A credit score includes your payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent) and types of credit used (10 percent), according to FICO. Keep in mind that there are different credit scoring models that may weigh these factors differently.
Do not exceed your credit limit
Avoid getting into a situation where you owe more than you can pay to avoid fines or increased interest rates. Keep in mind that a large part of your credit score (30 percent) takes into account the amount of money you owe compared to the credit that is available to you, so carefully manage your spending and use of credit cards.
Do not ignore overdue bills
Can one late payment negatively impact your credit? Absolutely. You might be surprised that even library books can affect your credit score! Unpaid government fines like parking tickets and unreturned library books can get sent to collections agency and can hurt your credit. Address all overdue bills, big and small, as immediately as possible.
Do not borrow more than you can pay back
If you buy a home and take out a mortgage, your monthly payment — including taxes and home insurance — should not exceed 28 percent of your monthly income. When you get much higher than this percentage, it can start to become difficult to pay back the money you’ve borrowed, which could hurt your credit score. If you have good credit, you are more likely to not only to get the loan you need, but also to get a better (lower) interest rate and terms.
Do not believe myths about what impacts your credit score
Remember that demographics don’t count when it comes to your credit score. It has nothing to do with your age, or where you live. Things that do matter? Paying bills on time and staying within your credit limits.
Higher credit scores can save you money in the long-term with lower interest rates on major purchases. The more you know about what factors into a credit score, the easier it will be to use credit wisely and have the financial confidence to take on the future. Remember, it is never too late to begin taking control of your credit.