Credit is important because it helps you borrow money. When people try to better manage their finances, they will generally cut back on purchasing, but they often overlook the importance of credit. If you’re cutting back on your frequent buying but have a terrible credit score, you’re not doing yourself any favor. Let's talk about your credit and how to improve it.
What is a credit score?
A credit score sometimes is called your FICO score. Essentially, it determines your creditworthiness, as it measures your likelihood of paying back a loan and your likelihood of paying it back on time. This score can influence whether a lender will lend you any money at all, and the interest rate they’re going to offer you.
Who monitors credit?
This varies depending on where you are located. Every country will have a credit reporting agency. In Canada, they have Equifax and Transunion. In the United States, they have Equifax, Transunion, and Experian. In the United Kingdom, they have Equifax, Experian, and Callcredit. Your credit report holds a lot of your financial history. It would indicate whether an account is open or closed. It’s also going to talk about the types of credit that you hold and have previously held, the amount that you had access to, share your current balance.
In terms of your repayment, it will report whether you have any delinquencies (30 days, 90 days, etc). If you’re delinquent, it will report if you’re frequently delinquent and the average time for repayment.
Why do we need to check our credit report?
- This is one way to avoid being a victim of identity theft.
- In pulling your credit report, you can determine if everything listed truly belongs to you. Check if there are any errors, misinformation, or reports of delinquency that is untrue.
- You can see your score and possible ways to improve your score if it isn’t as high as it should be. You really want to maximize that score in order to get really good access to credit and a good interest rate when needed.
5 Ways To Rebuild Your Credit
1.) Pay your bills on time
Sometimes bills are paid late simply because they've been forgotten. If you can automate your finances, get your bills rolling through your bank. Your phone bill, for example, can be set up for automatic payment through your credit card or through your bank account instead. This way, your bills will never be paid late. Be sure to review your credit card or bank statements regularly to be sure that you are in the loop regarding payment amounts being made from your bank account.
If you don't like automating your bills for fear that the company might charge you inaccurately, note bills with their due dates on your calendar. Google calendar makes it really easy to set recurring bill payments with reminders.
2.) Check your credit report
Pulling your credit report every six months or once a year is really important. Determine if the information is correct, be aware of your current rating, and look for ways to improve your credit score.
3.) Avoid running around and closing credit accounts
Once you review your report, you might see various accounts that say “Open”. Do not hurry to close these with the intention of improving your credit report. This will actually damage your credit scoring. Lenders like to see a long history of accounts, so don’t close a bunch of accounts. There are certainly reasons to close an account but do so cautiously and slowly. Keep those accounts that have lots of your history, as this information is usually favorable to your credit scores.
4.) Keep your borrowing low
If you have a $10,000 limit, do not maximize the whole credit limit as credit reporting agencies and lenders like to see your balance low. This is called your credit utilization rate. which looks at the total amount of credit that you have available vs how much of it is being used. The optimal level should only be around 30% or less. If you have a $10,000 maximum on your credit card, it’s best to keep your balance at $3,000 or less. This is also a way to keep debt lower.
5.) Avoid applying for lots of credits in a short amount of time
Whether it's for a mortgage or credit card, do not run around scouting different banks, trying to see who will give you the best offer. Your lender or your mortgage broker is checking your credit every time you do this, which slightly damages your credit score. Every time you’re making these applications, a little bit of damage is done. Certainly, when you’re making an application and you need a credit product, you have to take that step. The point is, do not check various institutions if you’re just searching for better rates. There are a lot of questions that can be asked to get a sense of an offering without making a formal application. If you’re applying for credit, make a habit of asking the person at the bank if they’re pulling your credit report or not. This keeps you informed of whether your application will impact your credit report.
Kelley Olinger is a Coach/Consultant and Founder of Reconcile Your Wallet (www.reconcileyourwallet.com), where she assists high-achievers to align their personal finances with their personal aspirations. Kelley worked in Residential Real Estate with a focus on pre-construction development for over a decade in Victoria, British Columbia, and recently completed her MBA. In this article, she discusses what is credit, why it matters, and what are some strategies to rebuild your credit once it’s damaged.