The cost of living basic life has been going up recently, but your credit score? That all-too-important number probably hasn’t joined in on the inflation bandwagon. In fact, inflation’s increased demands on your budget aren’t likely to do your credit score any favors.
But the reality of today’s economic situation doesn’t have to hamper your progress toward a great credit score. With a little understanding of how your score is tabulated, you’ll be able to make budget-friendly moves toward improving it.
You already know that your reputation precedes you. And beyond your social set, this couldn’t be more true than with your finances. Often your credit score is the only indication of whether lending you money is a safe move. Even if your income meets the basic criteria of the financial product you’re interested in, your score indicates your responsibility.
All the income in the world can’t combat poor spending habits, and a credit score will reveal the truth. Think of the stories about lottery winners blasting through millions in mere years. While the likelihood you’ll be faced with that dilemma is exceedingly low, there’s a lesson to learn: financial responsibility matters.
One way to build a reputation of financial responsibility is to ensure that your use and management of credit are solid. Add a credit builder card to your wallet, and with a good track record of on-time payments, you should see a boosted credit score. Use it regularly to establish a track record of using and repaying credit.
Aim to keep total credit utilization under 30% to have the most favorable impact on your credit score. If this utilization range feels out of reach, get creative with how you manage your use. Adjust your bill payment habits to pay down your monthly bill weekly. This approach can counterbalance your regular card use and reduce your utilization rate.
Paying your bills on time sounds like a no-brainer. But with the complexity of managing personal finances today, even the most detail-oriented person can forget a statement or two. On-time payments influence 35% of your score, making this factor the most powerful. On-time payments impact 35% of your score, making this factor the most powerful. However, missing a payment or making a habit of perpetual late payments can damage your credit score the most.
Paying for goods and services rendered is both the ethical and personally beneficial thing to do. After all, not paying your bills can do you significant harm. Utility companies will shut off your service after several missed payments. You could be cut off from services you rely on, like child care or your internet connection. When you’re more than 30 days late, creditors can report your negligent payment habits to the credit bureaus.
If you can’t make payments, be proactive and contact the companies in question. Some may be able to offer an extension, waive late fees, or provide access to assistance programs. If the service you’re struggling to pay for isn’t essential, ask about closing or pausing your account. Many entertainment providers offer this option, which can be helpful, especially if you’ve already committed to a contract.
Beyond adjusting your spending, set up automatic minimum payments whenever they’re offered. Ensure, however, that your chosen account can accommodate these payments, so you don’t create a new issue: an overdraft. Some people reserve one account to be their source of automatic payments and fund it with the balance needed each month. With this setup, you can be confident that you’re making credit-friendly moves with each bill you pay.
Paying off debt feels great, and it’s an accomplishment worth celebrating. But before you call up your credit card issuer and ask for the cancellation department, stop. Two credit score factors may be lurking under your card that you haven’t considered: account age and credit mix.
Driving 15% and 10% of your score, these two components often are forgotten before it’s too late. Continue pursuing your debt payoff goals, but consider retaining access to the credit you’ve now made available.
If the temptation of an open credit card is tough for you, find ways to avoid it. Secure it in a sealed envelope in a secure but less accessible place, like a safe or file cabinet. If you’ve memorized the card number, request a new one, and don’t activate it. Retaining access is important, which can increase your account age over time.
Regarding credit mix, there are two types of credit to be aware of: revolving credit and installment credit. Revolving credit, like a credit card, changes based on your usage. Revolving credit, like a credit card, changes based on your use. An installment loan, like a mortgage or car loan, is broken across a fixed number of payments. These loans have a defined payoff date, and it usually makes sense to complete them. Demonstrating responsible use of each type of credit will give you a full credit profile.
The human response isn’t always logical when the ability to provide basic needs seems threatened. Surging prices at the gas pump and grocery store can cause even the calmest minds to panic. The human answer isn’t always rational wIn reality, no one knows what will happen, even if top economists have compelling arguments and data sets. That’s why ensuring you’re building a solid financial foundation should be a personal priority.
Assess your current financial situation and determine where your vulnerabilities are. Establishing great credit is always a smart move, and the actions required to earn an enviable score can improve security. Managing debt, fulfilling your financial commitments, and maintaining access to cash and credit give you options. You’ll be able to weather the economy’s storms thanks to your preparation and financial smarts today.