Credit cards have become basically synonymous with American finances. With them, a person is also assigned a credit score. This score serves as a “trust meter” a bank assigns to you. A higher score means that you are more trustworthy when it comes to your finances. Higher credit score can bring you many benefits. But, in the same way, bad credit score can bring even more detriments. And since everyone likes to be treated the best they can, let us take a look at not only how to achieve a high credit score, but also how to keep it high.
How to get good credit score?
As we’ve established before, a credit score is assigned to you by your bank. Some banks might have slight differences in their credit score policies, but they always stick to a specific formula. Here are just some of the things your bank checks.
Build a credit history
The best way to show that you can handle your credit card is to actually do it. The time you had your credit card for can greatly influence your credit score. If you just got your card only a week ago, of course the bank won’t give you a high score. But there aren’t many things better for proving your financial experience than a decade of credit history.
Pay your debts on time
Another great indicator of your trustworthiness is how well do you pay your debts. You usually have to pay your credit card debt every month. If you often miss these due dates, you can be sure your credit score is going to suffer. However, paying all of your debts on time is the next best thing to bump your credit score as high as possible in the beginning.
Don’t approach your debt limit
This might seem weird at first. The bank gave you a certain limit on how much money you can use each month, why shouldn’t you use it all? Well, if you do often reach you debt limit, or even surpass it, your credit score will suffer a lot because of it. The thing you should do is only use about 20-30% of your debt limit (i.e. if your limit is $3,000, you should watch out and only spend around $1,000).
Don’t apply for unnecessary credit
This one is a lot more simple. If you take on a lot of credit at once, it might appear to some that your financial choice isn’t the best. Because credit scoring formulas look at your recent credit activity, it’s best to only take credit you need. But be careful to not overdo it, because always being at your limit is also not a good thing, as we’ve established in the point before.
Fact check your credit report
If you spot a suspicious error in your credit report, be sure to dispute them. Not only will you prove that you are aware of your credit score, but you can also spot potential thieves and possible frauds. Believe me, it’s really great for your image as a credit user, if you show that you can find a thief/fraud, just by looking at your credit report.
Benefits of high credit score
When you prove that you can be trusted with borrowed money, it can give you a lot of benefits and extra options in many aspects of your life.
Better insurance deals
The best for first: Insurance. According to the CFPB, insurance carriers can use your credit reports to help decide whether to approve your application and how much to charge you. Once you’re a customer, they may check your credit to help decide whether to raise your premiums or even deny you the chance to renew your policy. So be sure to keep your credit score as clean as possible.
Lower credit card interest
Whenever you apply for a new credit card, your provider will more than likely check your credit score. Depending on how good it is, they will then decide on your APR (annual percentage rate). This is basically how much you pay the provider for lending you their money. The better your credit score is, the better APR you will get
More credit card limit
Not only can a good credit score grant you better interest rates, it can also help you increase your limit. When you prove that you can be trusted with their money, people will give you more of it. Basically, since a good credit score may signal to lenders that you’re a good credit risk, they may be willing to lend you more money.
More housing option
Better credit score may also reflect on your housing options. If you have a good credit score, you may get a better mortgage deal. A good credit score can also open much more possibilities for your house. Since landlords will often check someones credit score to find the best applicant, having a high credit score will make you more appealing as a tenant.
Better image for possible employers
When you apply for a job, some companies may look at your credit reports as part of a background check. While it’s possible to get a job with less-than-perfect credit, employers might see things like late payments and bankruptcies as possible red flags. That’s why the CFPB recommends checking your credit reports before you start looking for a job.
Maintaining a good credit score
What should you do:
- Borrow only what you can pay – If you get into too much debt, it can end in many different scenarios, but none of them are good for your credit score. Be it trouble with the law, or even a bankruptcy, it can stay with you for a long time.
- Limit credit applications – Applying for credit frequently in a short space of time can make lenders think you’re overly reliant on credit and therefore a higher risk. It doesn’t matter what form of credit you apply for, or how much you’re asking to borrow – each application will record a hard search on your report which companies can see.
- Have as few defaulted accounts as possible – An account can default for many reasons. You could miss some payments, which made the company close your account. You could’ve even closed it yourself. Whatever it is, many defaulted accounts can reflect really badly on your credit score.
What shouldn’t you do:
- Apply for too many things at once – Each new mortgage, loan, or even credit card, is recorded on your credit score, usually bringing it down. These drops usually don’t last for very long though, because paying the loans off can then increase your score back up.
- Max out your credit card – as said before, the less you approach your debt limit, the better. So it only makes sense that maxing that limit can greatly affect your credit score. Depending on your card’s credit limit, making a large purchase or simply running up your balance can increase your credit utilization ratio, the second most important factor in calculating your credit score.