While we all like to give and be given second chances, the sad fact is that your economic past has the ability to make or break your financial future, especially when it comes to your credit score. For better or worse, those three digits are more than just a number — they are also a reflection of your ability to make a comfortable life and achieve your dreams.
If your aim is to start your own business, poor personal credit can make it difficult to acquire the capital you need to make your business a reality. If you need to buy a new car, lenders are likely to think twice about funding your new ride if your credit score is low. Not to mention, a low credit score often leads to higher interest rates on future credit cards, significant hurdles for mortgage loans, and can even prevent you from getting certain jobs.
Getting your credit score to the place you want it to be isn't always easy. By understanding how your credit score works and developing better financial habits, you'll find that you can get those three crucial digits that you want.
Spotting the Storm
Having a low credit score can feel like there's a perpetual storm cloud hanging above your head, preventing you from enjoying anything at all. Understanding how your credit score is calculated and what kinds of actions influence is a big part of getting that storm cloud to leave you alone.
The score itself is typically calculated through a few different categories: amounts owed, new credit, length of credit history, types of credit in use, and payment history. The two most important factors in your score are typically the amount of debt you currently have and your payment history, so having a large amount of outstanding debt or a history of paying bills late can have a larger effect on your credit score than requesting a bunch of new credit cards, even though both aren't ideal.
Further, a single mistake can set your credit back by a large amount. To quote one US News article,
"Messing up just once could result in a serious loss of points that will take a long time to correct. For instance, if you don’t pay a bill and it goes into collections, you’ll lose a lot of points from your credit score – perhaps as many as 100. You’ll have to demonstrate years of positive payment history to get your score back to good form."
Thus, the best piece of advice on having a good credit score is to avoid letting it drop in the first place. However, if you do find yourself trying to recover from sub-par credit history, you do have options available to you.
Facing the Weather
According to CreditKarma.com, a good credit score is above 720. If you score below this number, here are a 3 tips on raising it:
1. Set up Automatic Payments
Online banking tools can be incredibly helpful, especially when it comes to remembering your payments. Set up automatic bill paying to ensure that you always pay on time to avoid late fees. By setting up automatic payments to come out of your paycheck, you can prevent yourself from accidentally spending money you don't have. This will be key in raising improving the payment history rating in your credit score.
2. Create a Budget and Stick to It
Carefully monitor your expenses each month, and cut out any expenses that are not crucial. Pay off any balance on your credit cards right away so that you don't accrue interest. Credit card debt often comes with high interest rates, so it's especially important not to spend more than you have. Ask yourself, could I pay with cash today? If the answer is no, then think twice about making that purchase.
3. Leave Accounts Open After You've Paid off Debt
Keeping accounts open where you do have good credit history is an excellent way to build an maintain a higher credit score. This Bankrate article explains it well:
Leave old debt and good accounts on as long as possible. This is also a good reason not to close old accounts where you've had a solid repayment record. Trying to get rid of old good debt is like making straight A's in high school and trying to expunge the record 20 years later. You never want that stuff to come off your history."
If your credit score isn't great because of your past financial decisions, today is the perfect day to get started on clearing it all up. Bringing some routine and discipline into your financial habits will go a long way. A good credit score means having a lot more financial freedom, so set some realistic short-term and long-term goals and monitor your score monthly to track your progress. I can guarantee you seeing that score go up, even incrementally, will feel really, really good. Sometimes, those dark, debt-filled rain clouds seem permanent, but by caring for your credit score, you do have the power to get the sun shining again.
Have any good tips on maintaining, building, or tracking your good credit score? Tweet us @Lindsey2Wealth today!