Step 94: Beware your Credit Score

Your credit score is important when you want to qualify for a loan, such as a mortgage or a car loan, or many other financial products including insurance policies. Only with a high credit score will money lenders want to give you a loan. If your credit score isn’t high enough they won’t want to give you a loan, meaning you either won’t be able to buy your house, or you might only be able to get loans with high interest rates. Nowadays some employers even check credit scores of job applicants so maintaining a positive score is truly important not just in order to get a loan but potentially also when it comes to applying for a new job.

The importance of having a high credit score:

• It gives you lower interest rates on loans and mortgages. As you know by now, even small differences in percentages can make a huge difference over time.
• Landlords usually evaluate rental applications on credit scores as with a higher credit score they believe you are less likely  to default on your payment of the rent.
• Other financial products such as insurance policies as well as investment opportunities are sometimes only granted to those who have a sufficiently high credit score.
• Certain companies and employers don’t hire people with low credit scores as they believe these people have less self-control and are less goal-oriented.
• Higher credit scores increase your chances of getting a higher credit limit. This in turn helps you decrease your credit utilization rate (see further below)

Tips to improve and maintain a credit score:

• Don’t ever default on a credit card payment. At the end of each month make sure that you pay the minimum you are required to pay.
• Start paying off your debt, this shows that you are a responsible person looking to reduce your debt instead of constantly living with outstanding amounts.
• Once you’ve paid off all outstanding credit card debt, make sure to pay off your credit card in full at the end of each month from now on.
• Maintain a low credit utilization ratio, i.e. the percentage of your credit limit you use. Try and keep it below 30%. For example if you have 3 credit cards with a $1,000 limit, aim to use no more than $900.
• Don’t apply for credit too often or for too long. A credit company will keep track of any inquiries they receive and if somebody has been marked with having made lots of enquiries or over an extended period of time, your score again goes down.
• Close cards you are no longer using. This might reduce your credit utilization percentage, but having many different cards also imposes a risk of fraud, theft and temptation to use more than you need.
• You usually get a better rating for cards that you’ve had for a while, so avoid closing long-term cards.
• Keep track of your credit score regularly, e.g. monthly. You can easily check your credit score online.
• Start build your score early on. The longer you give it time, the better your score.

Additional tips for responsible users:

These tips are only for those who feel they have a very strong self-control and can use credit cards very sensibly and responsibly.

• Keep using your cards for small amounts (knowing you will be able to pay off the card each month), as responsible usage will increase your score.
• Apply for a credit increase. This means that  your credit utilization ratio will be better as long as you don’t use your card more.

Step 94 – Beware your Credit Score – in detail:

• Start by checking out your current credit score. There are many online sites and resources available that let you check out your credit score for free, depending on where you live or where you have your credit cards.
• Go through any credit cards you currently have and check the following for each one:
  • Limit
  • Outstanding balance
  • Interest rates and interest-free periods you are still enjoying
  • Length of time you’ve had the card for
  • Rewards and cash back schemes you are getting
• Decide which ones of these cards to keep and which ones to close. Generally speaking having 2 or 3 cards is probably more than you really need – consider having just one card. Cancelling all of your cards is also an option if you struggle using cards responsibly and is definitely something to look into  even if that might initially sound like a rather drastically decision. Important is that you make it work for you. Evaluate all of your cards on the points above and see which ones work out best for you.
• Avoid applying for new cards unless it is absolutely necessary. Instead consider building up a decent credit score, then applying for an increase in your credit limit.
• Keep building your credit score slowly but steadily. It takes time to build up your credit score but follow these guidelines and you’ll see things improve little by little.
• Keep track of your score regularly by checking it monthly. In this way you know that what you are doing is paying off or whether anything has happened to your score that you weren’t aware of.

Credit scores can have a big impact on your finances, especially on loans that you apply for and the interest rate that you will be charged, so it is worth maintaining a high score to avoid unnecessary payments on interest over prolonged periods of time and to make sure you are getting the best financial products possible.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.