Your credit score is a three-digit number that can either pave the way to financial success or prevent you from reaching personal goals. The higher the score, the more you improve your chances of sustaining an excellent quality of life.
The Breakdown
Credit reporting agencies use several factors that together create your individual credit score. The major factors include your payment history, amount of debt, and length of established credit. The type of extended credit and inquiries into applying for credit also play a minor role.
Debt to Income
When your debt to income ratio is high caused by many forms of credit, your credit score goes down. This is because the more you owe out in multiple places the greater the risk you are to lenders to falter on your repayment. Thankfully, this is something you can control. Keep your credit card balances less than a third of the available credit and only take out a loan when necessary.
Reducing Debt
If you currently owe out thousands too many credit cards, reducing your debt may seem impossible. However, there are a few ways to consolidate the debt into one monthly payment allowing you to pay the debt off faster and minimize the repayment obligation. For example, if you live in Las Vegas, loans are available with less stringent requirements versus a traditional bank. Borrowing from your retirement account like a 401(k) will provide similar results. Only a 401(k) offers repayment with interest to you.
Payment History
Your payment history represents 35% of your final score. Even a couple of late payments can reduce your credit score significantly. On a bright note, you can improve your credit score gradually by making a commitment to pay your bills on time. Create a household budget to ensure you make your payments by the due date.
A Poor Credit Score
When your credit score dips to a poor status, it’s difficult to get anything on credit. It’s also true that improving a poor score comes with challenges. The good news is that you can increase your score.
Most credit card companies will not approve your application. There are some that offer secured cards where you use your own money as a guarantee of repayment. After six months to a year of being faithful, you can then apply for a credit card with a low balance of a few hundred.
Pitfalls of Bad Credit
Besides denial of loans, bad credit can affect every other aspect of your life. If you want to rent a vacation home, you need good credit. Insurance companies also use your credit score to minimize risk. With poor credit, you’ll need a deposit for things like utilities, cell phones, and cable television. If a bank will offer a loan, it will come at the cost of a higher interest rate.
Smart Money Management
Having too much credit, even paid on time, can cause your score to be lower. Managing your money better will prevent you from overextending yourself leading to increased debt. There are only a few debts that work for you, real estate and student loans are among them. A car loses value the second you drive it off the lot and credit card debt is not something that has any value. Make excellent choices for borrowing money. It’s always in your best interest to pay cash when possible.
A credit score is simply a three-digit number. But, that number can make life easier or more difficult. You can improve your credit score by practicing good money management. Only borrow when necessary, keep credit cards to a third of their available credit line, and make timely payments. If you budget your money, you’ll maintain a high credit score that will work for you throughout your life.
