Credit worthiness is a fundamental aspect of financial health. A good credit score can unlock many financial opportunities such as securing a mortgage, getting lower interest rates on loans, and even influencing potential job offers. In this article, we will discuss 4 key strategies to build and maintain good credit.
Understand your credit score
Understanding how your credit score is calculated is the first step to improving it. Here's a breakdown of what factors generally determine your credit score:
- Payment History (35%): This is your track record of paying back what you owe on time.
- Amount Owed (30%): This refers to how much of your available credit you're using, also known as your credit utilization.
- Length of Credit History (15%): This looks at how long you've had credit. A longer credit history is generally better.
- New Credit (10%): This includes recent credit inquiries and newly opened credit accounts.
- Types of Credit Used (10%): This refers to the mix of different types of credit, such as credit cards, mortgage loans, or student loans.
By understanding these factors, you can strategize how to improve your credit score. For example, if your credit utilization is high, you might focus on paying down your debt. Or if your credit history is short, you might wait before opening new credit accounts.
Maintain low credit utilization
Your credit utilization ratio, which is the amount of your total credit that you're using, makes up 30% of your credit score. A lower credit utilization ratio is better for your credit score. Experts recommend keeping your utilization below 30%, and ideally, even lower. This means if you have a credit card with a $1000 limit, you should try to keep your balance below $300.
Pay your bills on time
Since payment history is the largest factor influencing your credit score, it's crucial to always pay your bills on time. This includes not only your credit card bills, but also your rent, utilities, and any other ongoing commitments. If you struggle with remembering due dates, set up automatic payments or reminders to ensure you always pay on time.
Mix up your credit types
Having a mix of credit types can positively influence your credit score. This doesn't mean you need every kind of loan under the sun, but a mix of a couple of different types of credit, such as a credit card and a student or car loan, can show lenders that you're capable of managing different types of debt responsibly.
In conclusion, building and maintaining a good credit score is a process that requires consistent effort and financial discipline. By following these four strategies, you can work towards improving your credit score and opening up new financial opportunities.