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How to build and maintain a healthy credit score
Your credit score is your financial resume. Lenders rely on your credit report to provide them with a synopsis of your financial health and credibility. If you have ever tried to open an account or borrow money with a low score, you know what it feels like to be rejected. Building a credit score and maintaining one are two separate processes, but cumulatively enable you, the borrower, access to purchases that are not feasible with cash alone. Not everyone has a cash reservoir available for a down payment on a house. Some purchases are better managed when they’re placed on credit cards.
Having no credit is just as troubling as having low credit. Lenders and financial institutions need to gauge how responsible you are with monthly payments through a credit report. So if you’re overspending or not paying your bills on time, it signifies that you are unreliable. If you pay cash for most items, the lack of a credit trail can raise questions as well. The goal then is to build a healthy and measurable credit history. This is accomplished by practicing good spending habits, checking your report periodically, and making outstanding bills a top priority.
Building a credit score
If you’re just starting out with a credit card, it is important to understand what determines an overall healthy score. Creditors and lenders look for the obvious. They want to see that you are a savvy and responsible consumer. This is apparent by the way you manage your spending habits. If you’re paying your bills on time, maintaining a sound ratio of income to the number of outstanding credit you have, then you are heading in the right direction. If your report shows that you are constantly opening and closing credit cards, or you’re holding them for short periods of time, they’re sloppy habits that raise some concern. To demonstrate that you are creditworthy, find a balance between the number of cards you own, the length of time you own them, and how you manage their payments. Whether or not you pay the full balance is not any type of indicator to how responsible you are. Rather, it is whether you pay your bills on time every month.
Check your credit report periodically
As a consumer, you are entitled to check your credit score yearly. Requesting access to your score more than that is held against you. As for the credit report, you can view that online or through your financial institution as frequently as you desire. But if you’re reviewing your reports consistently to check for any questionable activity, a yearly access to your overall score is fine. Look for any credit cards under your name that you may not have opened. It could be a clue into identity theft. Your personal info may have been compromised. Also check for any activities that reflect nonpayment of your monthly living obligations, such as rent or mortgage. If anything pops up as odd or fraudulent, you have the right to challenge it. Ignoring it will only depress your overall credit score. The sooner you address the matter, the better your chances of maintaining a healthy credit history.
Resolve issues with outstanding balances immediately
Let’s face it, we are busy. Especially for those statements that arrive unsuspectingly by mail with a cautionary word to pay a bill you are not familiar with or can’t even remember. You toss the letter into your purse, or place it in your glove compartment, because you really intend to look into it. But alas, the days go by and you become even busier. You overlook those red, bold letters emblazoned on the front of that envelope. Next thing you know, you receive a follow-up letter by mail reminding you that said outstanding payment is now overdue. Your intentions may have been sincere, but your credit score is most likely affected. Some outstanding payments can reduce your score by a hundred points. When those unfamiliar statements arrive, make them your top priority. Your financial resume depends on it. A brief phone call or email to the charging facility can stall that dangerous process of forwarding your balance to collections, which will inevitably hit your credit report.
If a large purchase is in your future, take these steps to start building a credit history and maintaining a healthy score. You may be able to lay out cash for some purchases, but a sound credit score will help you invest in those goals that require borrowing. Diligence and effort will go a long way in turning those goals into reality.