Finance

How to Build Credit As Prices Rise

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.

1. Establish a Reputation of Responsible Credit Use

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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. Just 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 ensuring 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 drive down your utilization rate.

2. Make Paying Your Bills on Time a Rule

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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 bill or two. However, missing a payment or making a habit of perpetual late payments can do the most damage to your credit score. On-time payments influence 35% of your score, making this factor the most powerful.

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 that 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 truly can’t make your payments, be proactive and reach out to 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 in place, you can be confident that you’re making credit-friendly moves with each bill you pay.

3. Think Carefully Before You Close Accounts

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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 respectively, 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 place that’s secure but less accessible, like a safe or file cabinet. If you’ve memorized the card number, request a new one and don’t activate it. What’s important here is retaining access, 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. 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. Revolving credit, like a credit card, changes based on your usage. Demonstrating responsible use of each type of credit will give you a full credit profile.

Take a Measured Approach to Your Finances When You’re Feeling Inflation’s Pinch

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Surging prices at the gas pump and grocery store can cause even the calmest minds to panic. When the ability to provide basic needs seems threatened, the human response isn’t always logical. In reality, no one knows what’s going to 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 of earning 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.

Elizabeth R. Cournoyer

Web enthusiast. Internet fanatic. Music geek. Gamer. Reader. Hipster-friendly coffee practitioner. Spent 2001-2007 merchandising human hair in Fort Lauderdale, FL. Spent 2001-2007 short selling tinker toys in Fort Walton Beach, FL. Spent 2001-2007 importing acne in Phoenix, AZ. Spent several months importing methane in Mexico. Spent the better part of the 90's creating marketing channels for wooden horses in Bethesda, MD. Lead a team implementing toy monkeys in Deltona, FL.

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