A decent credit score is critical to managing your finances. Good credit helps you secure lower interest rates when borrowing for purchases such as a home or car. Your credit score is also used by financial institutions to determine their willingness to lend you money. Generally, a score of 700 or higher is considered good, and above 800 is excellent. For those who have a score under 700, there are simple steps you can take to improve your score.
First, it’s important to keep track of your score and understand the various components that go into calculating the score. A few main factors go into this calculation, and you can control most of them with a little bit of work and discipline. Most important is your payment history, which is your track record of being on time with payments on things like credit cards and mortgages. Making it a habit to pay your bills in full each month is critical, as even missing one payment can negatively impact your score.
Next in importance is credit usage, which is the ratio between the total balance you owe and your total available credit on all your revolving accounts (credit cards). Generally, keeping your credit utilization under 30 percent will have the best impact on your overall score. Credit usage is also one of the only factors that you can change quickly to improve your credit health. The age of your credit accounts is another important factor and includes the age of your oldest and newest accounts, and the average age of your accounts. Before closing a credit account, make sure to analyze the impact it may have on your average age of accounts. Closing an old account can significantly reduce your average age of accounts, which can negatively impact your score.
Managing your credit can be challenging at times and takes some work, but the benefits of having a healthy credit score are worth the effort. Even if you have a low credit score, it is never too late to start taking steps toward a better credit future!
- Choose your credit tracking tool. To help track your credit, find an easy tool that can be used for free. Credit Karma is a free app that provides you with information from both TransUnion and Equifax. There are also a few credit cards that will provide a free credit report, such as Amex Everyday Credit Card from American Express and the Discover It Cashback Match card.
- Pay your bills! Make sure you pay your bills in full each month. Get into the habit of only spending what you can afford to pay off in full, so you can build a track record of paying on time.
- Decrease your credit utilization ratio. This can be accomplished in a few ways, such as paying down balances and decreasing your spending. If you are disciplined with your credit cards, you can also decrease your ratio by increasing your credit limits and by opening a new credit card.
- Certified Financial Planner Board of Standards, Inc.® owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
- Advisory Services offered through Kolinsky Wealth Management, LLC an independent Registered Investment Advisor, Securities offered through American Portfolios Financial Services, Inc., Member FINRA, SIPC, Kolinsky Wealth Management, LLC is not affiliated with American Portfolios Financial Services, Inc.