Your credit score plays a crucial role in renting an apartment, buying a car, or applying for a loan. It informs lenders about your financial reliability and ability to repay debts. Knowing the rules of managing your credit score can give you an advantage.
The Credit Score Game
Tiffany Aliche, known as the Budgetnista, explains that there are many misconceptions about credit scores. Conflicting advice can mislead you. For example, some suggest paying off your credit card in full monthly, while others recommend maintaining a small balance. According to Aliche, creditors benefit if you know less about managing credit, but understanding the rules is key.
FICO Score Importance
Focus on your FICO score, which ranges from 300 to 850. A score of 740 or above is considered strong, making it easier to secure credit.
Improving Your Credit Score
If you have little or bad credit, becoming an authorized user on someone else’s credit card can help. Ensure this person pays their bills on time to positively affect your score. This strategy was traditionally for youths to access credit cards but is now used to improve credit scores without physical card access.
Credit Utilization
Aim to use less than 30% of your credit card limit. For example, if your limit is $1,000, limit your spending to $300. Higher utilization can lower your score. If you need to use more of your limit, pay off the balance before your statement date, not the due date, to avoid affecting your credit score.
Paying Off Credit Balances
Pay your credit card balance in full each month. This habit is beneficial for your credit score. Contrary to some beliefs, keeping a small balance isn’t necessary and only incurs fees.
Credit Limit Increases
Requesting a credit limit increase might involve a “hard inquiry,” affecting your score. Inquire with your credit card company beforehand to see if it’s worth it, especially if your credit is already strong.
Credit Score Breakdown
- Payment History (35%): Regular, timely payments are crucial.
- Amounts Owed (30%): Keep utilization below 30%.
- Length of Credit History (15%): Maintaining old accounts can help.
- New Credit (10%): Opening new lines can temporarily lower your score.
- Credit Mix (10%): A variety of credit types is favorable.
What Doesn’t Affect Your Credit Score?
Your job, income, savings, marital status, and children are not considered in your credit score.
Building Credit
Start building credit when you can manage it well. It’s better to have no credit than to abuse it. Banks typically prefer applicants with at least three lines of credit for home loans.
Finding Your Credit Score
Your credit score is available through online banking portals or agencies like Experian, TransUnion, and Equifax. Expect variations among agencies.
This article first appeared on November 10, 2020. The podcast was produced by Clare Marie Schneider.