You probably know that your credit score determines how much interest you have to pay when you borrow money, but did you know that it also affects a bunch of other areas of your life?
What you pay for auto insurance, your ability to get and keep a job, buying a house, renting an apartment, getting a cell phone - all of these can be more expensive if you have a low credit score. Some auto insurance carriers may increase your monthly payment more for having a bad credit score than if you get into an accident, and in 39 states, it is legal to not hire someone for a job because of their credit score. Life literally becomes more affordable the better your credit score is.
Getting a good credit score comes down to five things:
- Paying your bills on time. Paying your bills on time is the most important thing you can do to improve your credit score! This includes all of your regular bills, rent, mortgage, utilities, etc. and your loans and credit cards. Something many people don’t know is that while paying your rent on time doesn’t improve your credit score, being late can cause it to take a hit. Doing this makes up 35% of your overall score and it is the most important thing you can do for your credit so if your find yourself in trouble on a bill, reach out and ask for help. Don’t let a late payment happen because you stayed silent and didn’t ask for help. We want to hear from you if you’re going to have trouble making a loan payment and other creditors do as well. This is especially important if your income has been impacted by the Coronavirus.
- Keeping your credit card balances low. Keeping your credit card balances low is the second most important thing you can do for your credit score, and it makes up 30% of your score. There is a myth out there that you need to carry a balance on your cards to improve your credit, I’m here to debunk that myth! Ideally, you pay off your credit card balance in full every single month, but if you can’t, you want to keep those balances at 30% or less of your total available spending limit across all your cards. Pay off those credit cards to improve your score.
- Time is one of your best friends when it comes to credit. The age of your credit history makes up 15% of your score, but what does that mean? It means that the older your accounts are the better your credit will be. So as you look to improve your score only open new accounts when you need to, and avoid closing older accounts as much as possible.
- How many accounts you have. 10% of your credit score is made up from the type of accounts you have. The ideal mix is a mortgage, a credit card, and a loan like a car, RV, boat, motorcycle loan) but I tell people that when you want to build credit you don’t need a bunch of accounts, you just need a few that you manage well. You don’t need a bunch of accounts to have a good credit score.
- Applying for credit only when you need to. The last 10% of your score comes from how often you apply for new credit, and each hard credit inquiry docs your score about 3-5 points for a year. Those inquiries drop off after two years but treat your credit score with respect and only apply when you need to!
You can get your full credit report from www.annualcreditreport.com. This site is free and secure and the only place where you can get your full report for free. You can get your credit scores from websites like credit karma and credit sesame and using them won’t hurt your credit, but keep in mind that your actual credit score will differ from what you see there. Those tools give you an “educational score” not your actual score.
If you need help building your credit and aren’t sure how to start, talk with one of our financial coaches. We can help you come up with a plan to get your credit score moving in the right direction. Our advice and support is free and confidential. Protecting your credit score is vitally important right now.