Recent cases of credit-related incidents, particularly the Equifax data breach that has left about half of American’s identities vulnerable to fraud, have re-activated dialogue about protecting our finances. Regardless of specific incidents, protecting and sustaining a favorable credit score is important to many people. Many of us already know that paying down debts, making consistent payments and staying within our limits are broad components of a healthy credit score. These strategies have a number of details that illustrate how they influence credit calculations, which we’re highlighting to help increase awareness in improving and/or maintaining your score.
Paying Down Debts
Many are aware that carrying large loads of debt can bog down your finances, so it’s beneficial to understand how your balances affect your score. Your running credit card balance makes up 30% of your overall score, according to MyFICO, which makes it so important to always be aware of your balance (or balances, if you have multiple cards) and strive to keep each card balance within 30% of its credit limit. This doesn’t mean you should avoid making large purchases with a credit card; several cards offer cash back benefits on purchases, and using a credit card can sometimes offer additional purchase protections- just remember to have a plan in place to pay off the balance of your purchases every month.
Payment history plays a significant role in your credit score, amounting to 35% of its calculation. Late payments can lower your score, and missed payments can deal a more damaging blow. Setting up automatic payments is one of the best ways to prevent missing or delaying a payment. Remember to monitor your accounts to make sure payments are being made, and that they’re being made before incurring interest.
Staying Within Limits
One of the easiest ways to stay within 30% of your credit limit is to set up an alert with your credit card to notify you when you’re coming close to reaching that limit. For example, if you have a card with a $10,000 limit, you would strive for a running balance of no more than $3,000. Setting up an alert to notify you when you’ve reached a balance of $2,500 will help make sure you don’t exceed 30% of your limit.
As we’ve previously noted, keeping your balance within 30% of your limits contributes to a healthy score, but lower is even better. Ideally, your balances should be as low as possible, not only for the sake of your score but also in the case of an emergency which requires you to use that credit. Some credit cards will automatically increase your credit limit over time, but not all. For those with a good payment history and credit rating, an increase in your credit limit can be helpful as it widens the gap between your balance and your limit.
Ensure the Accuracy of Your Credit Report
Unfortunately, errors on your credit report are possible, and they can negatively affect your score. Credit data breaches have become an increasingly common issue, so it’s important to review your credit reports to ensure that everything is accurate. New England Investment and Retirement Group Operations Manager Danielle Place recently explained the importance of presenting any errors to the credit reporting agency or agencies showing the error. Cleaning up inaccuracies in your credit report will help resolve the negative impact affecting your score.
Tips for Beginners
For those who are new to building credit, there are steps that can be taken to help you start off on the right foot. Avoid trying to quickly build credit by applying for several credit cards at once; each application results in a “hard inquiry” that may lower your score, which can be especially harmful if your credit history is new or on the low side. Beginning with a secured credit line is among common methods to build credit. A secured line requires a cash deposit which acts as your credit limit, your limit increases if you add to your cash deposit.
Becoming an authorized user on another individual’s credit account can also help build your credit. When a primary account holder maintains a good credit score with appropriate strategies, it helps boost yours as an authorized user. Since this requires approval from another person, this type of credit-building can be complex. An authorized user should exhibit responsibility in maintaining proper spending and payment habits, and a well-understood agreement between the two parties should be established.
Keep in mind that proper credit takes time and discretion to build, and your strategies should remain consistent even when you have great credit. There are a number of companies that promise to quickly improve credit scores- some claim within as quickly as a month- but your credit score strategies shouldn’t involve interference from a third party offering a quick fix. At NEIRG, we believe that diligent maintenance and awareness is key to a strong credit score that contributes to an overall favorable financial position.