So how do we win the game of credit? It impacts our ability to purchase a house, secure a car loan, and even land a job. But many people don’t fully grasp how credit works. Not knowing enough about these things can lead to expensive blunders and challenges in reaching financial peace. The bottom line is that knowing a few credit secrets can enable you to get a handle on your finances.
This post will uncover the tips that can help take your credit score to the next level, the tips that can save you money, and most importantly, give you the financial freedom you deserve. By the end, you’ll be equipped to make better decisions with credit and steer clear of common traps.
1. Learning About Credit Scores
Before jumping into the credit secrets 11-word phrase, it’s a good idea to start with the basics of credit scores. A credit score is a three-digit number that indicates your creditworthiness in the eyes of lenders. It spans from 300 to 850, and higher is better. Many different factors impact your credit: payment history, credit utilization, length of credit history, etc.
Lenders rely on your credit score to determine whether to approve loans and at what interest rate. A high score indicates that you’re a low-risk borrower, and you may qualify for better loan terms. A low score, on the other hand, can lead to problems getting credit or result in higher interest rates.
2. The Power of Paying on Time
Payment history is the biggest impact 11-word phrase and one of the highest credit secrets. One missed payment can drop your score substantially. Creditors will report missed payments to the credit bureaus, and this mark can remain on your credit report for years.
Automation and reminders are keys to making sure you never miss a due date. If you miss a payment, making it as soon as possible will help minimize the damage to your score. Regularly making on-time payments will develop your credit over time and demonstrate to lenders that you’re reliable.
3. What You Should Know About Credit Card Balances
A lot of people think carrying a small balance on their credit card boosts their credit score, but that’s incorrect. To improve your score, keep your credit card balances low. Your credit utilization rate is how much credit you’re using compared to your total credit limit. Experts suggest this number should be less than 30 percent, but lower is better.
For instance, if your credit card limit is $1,000, your balance should be under $300. The best way to avoid interest charges and keep your credit utilization low is to pay off your balances in full each month.
4. The Importance of Reviewing Your Credit Report
Your credit report includes everything that matters for your credit score. But mistakes on your report can negatively impact your score and make it more difficult to be approved for credit. That’s why reviewing your credit report regularly is important.
Federal law entitles you to a free credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once a year. If you notice errors, you can dispute them and have them removed. Correcting missteps on your report can lead to rapid improvement in your credit score.
5. The Myth of Closing Old Accounts
A lot of people believe that closing older credit accounts benefits their credit score, but it typically has the opposite effect. Closing an old account can shorten your credit history and increase your credit utilization ratio, both of which can lower your score.
Unless the card has high fees or you no longer trust yourself to use it, keeping it open should benefit your credit. If you don’t use the card regularly, small purchases and paying them off each month can prevent the account from going idle.
6. The Impact of Hard Inquiries
This is called a hard inquiry on your credit report. This might reduce your credit score a little bit, particularly if you apply for multiple loans or credit cards within a short period of time.
If you’re shopping for a mortgage or auto loan, multiple inquiries in a brief period (typically 14 to 45 days) will be treated as one, so it’s a good idea to compare rates quickly. However, applying for more than one new credit card at a time can make you seem credit-hungry and potentially bring down your score.
7. Credit Percentage vs. Available Credit
Your credit utilization ratio tells you how much of your available credit you’re using. There’s also a high utilization rate, which can indicate to lenders that you’re financially struggling.
One way to reduce your utilization is by requesting a credit limit increase. If your limit increases but your spending doesn’t, you’ll look better, utilization-wise. But make sure you don’t spend more once you have a higher limit.
8. The Role of Various Credit Types
Maintaining a combination of credit types can improve your score. Lenders prefer to see that you can manage varying types of credit responsibly.
Credit types fall into two main categories: revolving credit (like credit cards) and installment loans (such as auto loans or mortgages). If you have only credit cards in your name, adding an installment loan and making payments as agreed can help your score. That said, you should borrow only when necessary.
9. How to Get Negative Items Off Your Credit Report
Bad marks such as late payments, collections, or bankruptcies can remain on your credit report for years. But there are ways to mitigate their effects.
For a late payment, you can request a goodwill adjustment from your lender. They do this and omit the late payment from your report as a favor. And even if you have accounts in collections, paying them off won’t take them off your report, but it can help improve your credit ranking over time.
Source: Canva
10. The Role of Authorized Users
Adding yourself as an authorized user on a family member’s credit card who has good credit can also help build your credit. That positive payment history will appear on your credit report, increasing your score.
But this only works if the primary account holder has good credit habits. If they miss payments or end up maxing out their card, though, it can hurt your credit instead of helping it.
11. Why It Matters for Your Credit Score
Good credit management starts with money management. If your spending exceeds your earnings, and you use credit to pay for your expenses, you’re probably going to find it hard to keep paying your bills on time.
Budgeting allows you to manage your income and expenses to avoid missing payments. The better you manage your money, the more you’ll be able to maintain good credit.
12. The Danger of Payday Loans
Payday loans may appear to be an easy way to access quick cash, but they have exorbitant interest rates and fees. They keep borrowing to pay off the previous loan in a never-ending cycle of debt.
These loans don’t typically boost your credit score and could go into collections if you default on them. Try other things, however, such as borrowing from a friend, taking out a personal loan, or revising your budget to include expenses.
13. The Long-Term Value of Good Credit
Good credit is not limited to your ability to acquire a loan, it impacts many facets of your life. A high credit score may entitle you to lower interest rates, better rental contracts, and even more job opportunities.
Developing good credit takes time, but the hard (and smart) work is well worth it. Making small, intelligent financial decisions now will lead to greater financial freedom for you later on.
Conclusion
Knowing how credit functions can be one of the biggest changes in your financial life. Some of these credit secrets are less obvious from paying your bills on time to keeping your credit utilization low.
Avoid common mistakes by checking your credit report for errors, keeping old accounts open, and being cautious of new credit inquiries. So long as you can stay consistent, make the right choices with finances, and not rack up debt, then you are well on your way to new and better opportunities and financial success!
FAQs
1. How long does negative information remain on my credit report?
Most negative items, including late payments and collections, remain on your report for seven years. Bankruptcies can linger for as long as 10 years.
2. Does checking my credit score affect my credit negatively?
No, requesting your credit score is a soft inquiry and does not affect your credit.
3. Can you establish credit without a credit card?
Yes, if rent and utility bills are reported to credit bureaus, then paying them on time can help you build credit. Otherwise, you could take out a credit-builder loan.
