Protecting your credit score is vital to your future buying ability. Whether you’re a recent college grad who’s just getting started, a young family planning to purchase your first home or you’ll want to accomplish some other financial goal in the future, chances are that your credit score will be of great importance to you.
If you’re concerned that your current credit score might limit your financial options in the future, or you simply want to ensure that you’re on the path of greatest financial security, taking the following actions can help you boost your financial power.
1. Pay Off Balances
One of the best ways to boost your credit score is to pay off your credit card balances, and there are two broad camps of thoughts when it comes to this strategy.
The first maintains that you should pay off the credit card that has the highest interest rates. The basis for this thought process is that you’ll save more money on interest and pay less for those purchases that you made with the card in the long run.
The other camp maintains that you should pay off the credit cards with the smallest balances first, then use the money that you previously used to pay them down to tackle the remaining credit card balances. The appeal of this approach is twofold. You’ll be able to see that you’re making progress in paying down your debt and, hopefully, be more likely to continue doing so. In terms of your credit score, lenders look less favorably on you if you hold several credit cards with small balances. Your creditors would rather see you have one or two credit cards with substantial balances than four with balances of $20 or $50. This is because they are concerned not only with the number of credit cards you hold but also how many of them have balances.
2. Pay Attention to Credit Ratios
Another way to improve your credit score is to keep the ratio of credit that you’re using low in regards to the amount you have available. Your credit rating goes up the smaller this percentage is. Aim for a percentage of 30 percent or under.
It might surprise you to realize that even if you pay off your credit card balances every month, the percentage of credit that you’re using every month could be higher than you anticipated. This is because some credit card companies use your statement balance when they report your information to the credit report agencies.
There are a couple of strategies that you can use to help your credit utilization ratio. First, you can consolidate multiple credit card balances by taking out a personal loan. Second, contact the company that issued your credit card, and ask if they’ll accept multiple payments. Many do, which means you can pay down your balances and keep the percentage of credit that you’re using low.
3. Don’t Remove Old Debt
If you believe that any debt is bad debt and should be removed from your credit report as soon as possible, you’re not alone. However, you’re also mistaken.
Not all debt is bad — at least not in the eyes of the credit reporting bureaus. Debt that you’ve paid off according to the terms that you agreed upon with the company improves your credit.
While negatives — late payments or credit card over the limit fees, for example — are bad for your credit score, establishing a long history of good debt shows financial stability and soundness. Eventually, negative items on your credit report will fall off, but some can last for up to seven years. Accounts that demonstrate a history of on-time payments should be kept open and on your credit history for as long as possible. It’s also a good idea to leave old accounts open if you have a positive record.
Keep tabs on your credit report by taking advantage of the free one you’re entitled to every 12 months. Visit credit monitoring websites to learn more about how to get your credit report from Experian, TransUnion and Equifax. Doing so provides you with the information creditors see when they consider your application for a loan or credit card.
Regards,
Ethan Warricks
Editor
Wealth Authority
