A good credit score is invaluable, especially with the state of our economy. If your credit score is less than acceptable, then landing a loan deal might be as hard as finding a needle in a haystack. Denying those with poor credit scores has been a trend with many lenders; they do so in order to minimize losses as a result of higher default rates being associated with lower credit scores. Typically, a low credit score is synonymous with poor financial management and an inability to make monthly payments in a timely manner. So it is very important to do what you can to have a good credit score as you will have access to a variety of much better loans and rates.
Importance of Good Credit Scores
- Low interest rates. Lenders always compete for borrowers with a good credit score. Many lenders will attempt to entice you their offers of low interest rates– the golden rule is “the higher the credit score, the lower the interest rate”. This is a sign that the down payment for a loan will be lower and you will also be able to complete repaying a loan within a relatively shorter period of time.
- Employment opportunities. Owing to the litigation costs associated with defaults, employers are constantly screening the credit scores of candidates before hiring. Employers are also interested in hiring employees who demonstrate a high degree of financial responsibility because this means they will not misuse the company’s resources.
- High purchasing power. This is perhaps the biggest advantage of having a good credit score. You easily gain access to a variety of loan products with a large credit limit on each of them. Ideally, you can spend a relatively small amount of money on a car, expand your small business, buy a better home or send your child to college.
Components of Maintaining a Good Credit Score
Good credit scores, unlike the weather, are not controlled by Mother Nature or fate. Thus you must employ a formula to help you garner the highest possible credit score. The components below, among others, will help you to maintain a good credit score.
- Don’t hit the credit limit. Hitting the roof of your credit limit can badly damage your credit score. One way of maintaining a good credit limit is to set a credit limit target, say 50%, beyond which you will not spend.
- Control all your debts. Your credit always reflects all of the debts you have, from mortgages to consumer loans. They may strain your overall budget or create an imbalance in your income and expenditure equation, leading to more trouble. Controlling all of your debts will positively be reflected on your credit score.
- Make payments on time. Perhaps the best technique for maintaining a high credit score is the regular and timely payment of your credit card debt. A single missed or late payment can have an effect on your credit score negatively in addition to penalties.
- Don’t close old credit cards. Your credit history contributes to about 30% of your credit score. Closing old credit cards means deleting your credit history—which lowers your credit score. Even if you don’t use them regularly; keeping them open enables you to have a stronger history.
- Maintain few credit cards. Every time you apply for a new credit card, your credit score is negatively impacted. You should therefore maintain as few credit cards as possible. A single inquiry may even take some points from your credit score, depending on the nature and amount in question.
- Check your credit report regularly. All three credit bureaus entitle customers to a free copy of their credit report from annualcreditreport.com annually. Since human systems make errors, check for credit limits that have been underreported, loan amounts that have been over reported and delinquencies that have been misrepresented. Requesting correction from the credit bureau will help you maintain a good credit score.
- Use your credit card. You credit history contributes to about 30% of your credit score. Failure to use your credit will therefore mean a poor credit history. A golden tip is to borrow and then repay regularly. For instance, you can borrow and repay after a week or a month.
- Avoid credit fatalities. Public record issues such as bankruptcies can have an impact on your credit for about 7 to 10 years. Making too many credit inquiries can also kill your credit score. Since only time can repair this, the best way to maintain a good credit score is to avoid bankruptcy at all costs.
- Select and use your favorite credit card frequently. FICO has established a model that penalizes you heavily when you have multiple balances. However, you can limit this by concentrating a bulk of your spending efforts to a single credit card. In the meantime, you can use the other credit cards on an infrequent basis, like once every three months. Failure to use your other credit cards reduces your credit score while closing them down kills your utilization ratio.
- Check the behavior of your actions with the FICO simulator tool. FICO provides a free simulator tool which shows you how your score behaves when you undertake particular actions. This tool will intelligently inform you when you need to repay more debt, change your loan type, or take out a new loan.
Following these tips will surely help you to maintain a good credit score. And with high credit scores, you will be on the road to low insurance rates and low or no security deposits. Be a guru in sound financial management today by striving to maintain a high credit score!