Credit scores represent your credit risk. In other words the lower your score the riskier you look to the creditor. By risky we mean that creditors will be very cautious in allowing you to borrow because they think you won’t pay on time or at all. Scores range from 300-900 points. If you strive for a score at or above 720, you’ve got a bright future ahead of you. Aside from paying your bills late, not at all, or filing for bankruptcy, these next 7 tips might be less familiar to you. We highly recommend you avoid these bad credit behaviors so you can be in a better position to purchase a home in the future.
1. You don’t track your credit score and request your free annual credit report.
When you are in the process of cleaning up your credit, tracking your score is vital. You may find that your score is lower because of inaccuracies in your report history. If that’s the case, you should report it. The Federal Trade Commission has authorized annualcreditreport.com to provide you with a free annual credit report from the 3 nationwide credit reporting companies – Experian, Equifax, and TransUnion. Click here for more information http://www.ftc.gov/bcp/edu/microsites/freereports/index.shtml.
2. You close your old, paid-off accounts.
Instead, leave them open and if applicable use them responsibly and pay on time. This will may your credit report and history longer, meaning creditors will see you as an experienced and responsible borrower.
3. You apply for all of those “pre-approved” credit cards.
The more inquiries on your report in a short period of time, the lower your credit score. While it does look good to have open credit, too many requests for credit makes you look desperate. It could appear to creditors that you don’t have a great enough income to pay out of pocket. If that’s the case, the last thing you should do is open a credit card and get yourself even further into debt.
4. You only pay the minimum amount due every month.
When you pay the minimum, most of the money goes toward the interest you’ve accrued. This means your balance won’t be paid off as quickly as if you paid a higher amount, such as double the minimum. Even better? Pay off the balance each month and watch your score sky-rocket in the next 6-12 months.
5. You don’t set a monthly budget.
When I was in 4th grade, my mom gave me a fake checkbook and register from something called “The Bank of Mom.” It taught me how to manage my money – all $15 I had to my name probably – so that I could start a real savings account. When I got my first credit card (from the Gap) I remembered the lessons from years ago and decided to only use it if I knew I had the money in my bank account to pay it off. Budgeting is the key to your credit success. Include utilities, rent/mortgage, gas, food, entertainment, and so on. Try this app: mint.com.
6. Your credit card balances are higher than your available credit.
Ideally you should carry a balance of no more than 25% of your available credit. If your cards are maxed out or close to maxed out, your score will suffer dramatically. You’ll have to be mindful of how much you spend on your credit cards and keep your balances low by paying on time and more than the minimum every month.
7. You think it’s too hard or you think you don’t have the skills.
Wrong – so wrong! Everyone has the ability to improve and maintain a fantastic credit score. With the current uncertain economic times and the staggering unemployment rates, budgeting could not be more important. If you avoid even 1 of these bad habits, you’re already on your way to great credit.