Building good credit is essential. You can pay for large expenditures over time using student loans, mortgages, car loans, and leases, but how you handle these and other debts significantly impacts your net worth. Also, how you manage these debts, plus credit cards and cellular and utility bills, profoundly affect your credit score. Credit scores range from 300 to 850. In general, scores above 700 are good, and scores above 800 are excellent.
Not only does your credit score determine your interest rate, but it also determines whether or not you will be able to get credit if you need to borrow. Remember that each lender has different requirements for a minimum credit score that they will approve for potential borrowers. Depending on the lender and the type of loan you are requesting, being in the “Good” range may not be “good enough.”
The first step in evaluating your creditworthiness is to check your credit report, which includes your entire credit history. You can request a free credit report once a year at AnnualCreditReport.com. Report any errors immediately to the three credit bureaus—TransUnion, Equifax, and Experian. Some personal finance websites, including Credit Karma and Mint, will provide your credit score for free. To learn more about credit reports and credit scores, visit https://www.consumerfinance.gov or https://www.usa.gov/credit-reports.
When it comes to credit cards, less is always more—this adage applies to the number of cards as well as to the amount on them. Having too many credit card accounts hurts your credit score. In my opinion, it is wise to avoid cards issued by a retailer, also known as a store card. You might get some benefit or discount when you open a store card account, but the act of opening the account hurts your credit score. If you want to reduce the number of credit cards, do not close more than one at a time. Closing several credit card accounts at one time will harm your credit score. Before you do anything, check your credit report. Sometimes a store card that has not been used for a while has already been closed by the retailer.
Paying your credit card bill on time and in full is the most important thing you can do to improve your credit score. You should also watch your usage. During your billing cycle, don’t use more than 30% of the available credit on the card.
Higher utilization hurts your credit score. Low utilization – 10% or less – can help improve your credit score. Utilization is the second most influential factor after timely payments.
