Having a good credit score is important. As much as I like Dave Ramsey, and agree with 85-90% of what he says, we disagree on a credit score because it is used for so many things, not just getting/having credit. Your score can be used when you apply for a job, get insurance (especially car), apply for some place to rent, and many more cases.
Plus, very few of us have enough money to just go out and buy a house cash, so you’ll need a good credit score to make that purchase.
Here are fine things that people with good scores have in common.
Pay their bills on time
Think being a little late isn’t that big of a deal? Well on time payments are the largest influencer of your credit score. And not just to credit companies. Also things like, rent and utilities will report to the credit bureaus. So make sure you paying your bills on time, and the full amount due.
Most people agree that if you can’t pay the whole bill, at least paying something will help, but I’ve not been able to find official documentation on this helping your credit score.
Minimize use of available credit
This is how much credit you can use, versus what you use. Your credit usage percent can be calculated by taking the amount you have borrowed (total minus your mortgage) and dividing it by the total amount of credit you have available.
Let’s do a simple example. Let’s say you have $50,000 available between 4 credit cards, and you have $5,000 that you are using. You would take 5000/50000 and come up with .1, or 10%.
Most people with a credit score of over 800 keep that percentage under 7%.
I notice that moving from 4% to 7% will drop me 5 or 6 points, move that to 10% and I’ll lose almost a dozen points.
This is also why cancelling a credit card can make your score drop temporarily, because your available credit goes down, which makes your credit usage go up.
Tip: Cut up your card, but don’t cancel it so you keep the available credit, but you won’t be tempted to use it!
If you can pay off your credit card(s) every month, you will be miles ahead on getting a good credit score.
Have a long credit history
Your credit score is partially based off of how long you’ve had credit. For years, I couldn’t break a number I was trying to hit, and it was because my history wasn’t that long… because I wasn’t an adult for that long.
It’s unfair, but it’s true. It’s also why canceling an old account can hurt your credit score.
Interestingly, I had a credit card for over ten years that the company quit providing. They switched me over to a new card. One credit bureau sees it as a new account, and a closed old account. Another bureau sees it as being the same account and I have a higher score through them since I have nearly twice the history for my longest account.
Apply for credit only when necessary
Every time you apply for credit, be a car loan, new credit card, mortgage, etc, it is reported. One or two every six months to a year is OK. More than that, and it can start to affect you credit score.
The good news is that credit checks from the same type of credit only count as one check. So if you are checking with multiple mortgage lenders, that is only one credit check as long as they happen in relative short period of time.
The exception to this is credit card credit checks. This is because you probably won’t be looking to buy two or three houses at once. However, you might open multiple credit cards in short order.
Choose credit cards carefully
While this won’t hurt your score directly, people with good scores learn to read the fine print. Not all credit cards are created equal. Will you have to pay an annual fee? What rewards do you get? What is your interest rate? These and many more questions should be looked into.
Generally, I avoid any cards with annual fees. I rarely buy enough to make it worth while, and I don’t care about the status of having a gold/platinum/etc card. I’m also not rich enough to utilize the private buying concierge service that it might come with…
I look for cheap cards. Since I pay mine off every month, I don’t worry about the interest rate, and focus on the reward. Once I got one I liked, I keep it to build my credit history, instead of swapping between them every few years.
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