Best Practices for Establishing Credit

In today’s world, a good credit score is a powerful tool for financial stability. It may determine if you can borrow money for a mortgage, car or other loan and what interest rate you’ll pay for that loan. Your credit score may also be a factor in whether or not you can rent an apartment or how much you pay for insurance. The two major credit scores are the FICO score used mainly for lending decisions, and the VANTAGE score, created by the three major credit bureaus to compete with FICO. They both have the same score range from 350 to 850, and the higher number you have the better your score. However, they differ on what constitutes a good score. All consumers have the right to get their free credit report every year from a reputable company, for example,

What Is a Credit Score?

According to the United Services Automobile Association (USAA) financial services, your FICO score is calculated from the following factors:

  • How much you owe
  • Your repayment record
  • How many years you have had credit
  • The types of credit you have
  • Whether you are asking for new credit

How to Have a Good Credit Score?

You can have a high credit score if you keep control of your credit. Once you get a home or car loan or a credit card, you need to keep track of your spending. If you go into debt and cannot get out of it, your credit score will drop. Some tips for managing your credit are:

  • Check your monthly statements for accuracy including checks, credit card transaction and ATM receipts. If there is any discrepancy, you should report it to the creditor and the credit bureau if necessary.
  • You’ll have an available credit limit. It’s important to spend within that limit. There is a 20/10 rule that is considered good practice. It means your credit card debt does not exceed 20 percent of your total annual income after taxes. Also, keep your monthly credit card payments less than 10 percent of your monthly take-home pay.
  • Save a little every month, so you’ll have an emergency fund. It should be about 15 percent of your available credit. Some recommend an emergency fund that consists of three to six months of your living expenses. The fund should be in a liquid account that earns interest. This will help you if you lose your job, so you don’t have to borrow immediately to pay your living expenses.
  • Try to pay your debts regularly. It’s important to make the minimum payment on credit card debt every month. This will help reduce the interest you pay. Never skip a payment.

How to Boost Your Credit Score

If your credit score has already dropped, there are some things you can do to raise it again. If you want to apply for a loan, get a new job or buy a house, it is recommended to take a few months or a year to raise your credit score, so you will qualify for the loan and get a lower interest rate. Employers believe people with higher credit scores are more responsible and make better employees. Here are a few things to do to raise your score:

  • One major factor is the ratio of how much revolving credit you have compared to how much you are actually using. The best ratio is 30 percent or less. One good strategy is to ask your credit card company if it will accept several payments in a month.
  • If you have small balances on several credit cards, make sure to pay them off and stop using them. You’re better off using two cards for everything because your credit report doesn’t have a lot of balances recorded.
  • It’s good to have old debt on your credit report. This is because debt that you have paid off on time is good for your credit score.
  • Don’t spend months shopping for any loan. It is to your advantage to take between 14 – 45 days to choose a loan depending on the type of software used by the lenders.
  • Always pay bills on time. A good credit score depends on regular, monthly payments.

How to Make Timely Payments

Since your repayment record is very important for your credit score, you need to know how to manage these monthly payments. Here are some tips for making payments on time:

  • Put all of your bills in the same place and keep a list of the payments you need to make each month. If possible, try to get the same payment-due date for each bill.
  • Try to pay your bills online or through the mail at least a week before the due date.
  • If possible, sign up at your bank for automatic bill paying. This way you don’t have to worry about the date.
  • If you move, make sure all of your creditors have your new contact information.

If you do fall behind on your payments, it will help you in the long run to contact your creditors and inform them. You can also ask them for an extension and assure them you have every intention of paying your debts.

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