What can I do to improve my credit?
This is a question that seems to be at the top of the list when we are trying to learn more about credit and the impact it has on our financial health.
Many of us sign up for credit monitoring services because we believe it’s too hard or too complex for us to manage credit concerns ourselves. Usually, these services will charge a monthly fee, so it makes us feel better thinking they are really looking into our credit and “watching over it” for us. You may find some of the answers to your questions or feel like you are getting something for the monthly fees charged. However, you need to be aware that if you sign up for one of these services, your personal information may be sold. This may result in offers that aren’t in the best interest of your current credit needs.
We suggest the following list of questions to gain a better understanding of the precise steps you should take to reach your credit goals.
5 Questions to Ask Yourself to Better Understand your Credit Score
- Have you paid your bills on time? You can count on payment history to be a significant factor. If your credit report indicates that you have been late in paying your bills, had an account referred to collections, or declared bankruptcy, it is likely to affect your score negatively.
- Are you “maxed out”? The amount of debt you have in relation to all available credit (your credit limit) should be watched closely. Once you have accrued debt that is more than 50% of your credit limit, it’s likely to have a negative effect on your score.
- How long have you had credit? The goal for this category is very simple: You want your credit reports to be as old as possible. You also want the average age of your accounts to be as old as possible. The older these are, the more stable your credit reports will become. It shows you are not jumping from one credit card to another. With stability comes a higher credit score.
While the optimal ages are a closely guarded trade secret, it’s safe to say that maximum points in this category are only earned over many years of credit history. Knowing how important these age measurements are allows you to make better credit shopping decisions. Don’t be concerned if you do not have decades of credit behind you, though. Generally, credit bureaus consider your credit track record. An insufficient credit history may affect your score negatively, but factors like timely payments and low balances can offset that.
- Have you applied for new credit lately? Credit bureaus consider whether you have applied for credit recently by looking at the number of inquiries (or “hits”) on your credit report. If you have applied for too many new accounts recently, it could have a negative effect on your score. The advice here isn’t to not open new credit accounts—just about everyone has to open credit card accounts, buy cars and houses, and finance other things—but you should be aware that each time a new account hits your credit file, the age of that account will become part of the averaging process. Since the account is brand new, it will lower the average age of your accounts. So, be selective when you are shopping for credit. Don’t open up multiple retail store credit cards around the holiday season just to save 10% off your purchase. The negative impact to your scores may cost you much more in the long run.
- How many credit accounts do you have, and what kinds of accounts are they? Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. Some credit bureaus consider the type of credit accounts you have. For example, loans from finance companies may have a negative effect on your credit score, whereas opening an equity line of credit (HELOC) or equity loan may be a good choice when looking to consolidate debts instead of opening another credit card. Be mindful of opening new accounts if you have other accounts that need to be paid off or consolidated.
Understanding everything that goes into a credit score can be complicated, but paying attention to your financial behaviors can allow for you to make huge strides toward a higher number.
Still have questions? Call Federal’s Certified Credit Union Financial Counselors to set up a personal consultation about your financial health today.
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January 16, 2018
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