Not only is having good credit a requirement for getting credit accounts at competitive interest rates, but it affects other parts of your financial life—even if you never take out a loan. Laura answers four questions from readers and podcast listeners about how to monitor, repair, and build credit for life.
There’s no escaping the fact that building and maintaining good credit is a fundamental part of your financial success. Not only is having good credit a requirement for getting loans and credit cards, especially at competitive interest rates, but it affects other parts of your financial life—even if you never take out a loan.
Lenders rely on credit scores as key metrics to understand how likely you are to repay debt. But many employers, merchants, and service providers also review credit files in order to understand if you’re financially responsible.
For instance, having subpar credit means you’ll pay more for certain types of insurance (in most states) and also puts you at risk for getting turned down for a job or being denied to rent an apartment or home.
Because the consequences of credit run so deep in our financial lives, it’s important to understand the system and manage your credit wisely. In this post I’ll cover four questions from Money Girl Podcast listeners about how to monitor, repair, and build credit for life.
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Best Ways to Monitor, Repair, and Build Credit
Since few of us are taught the ins and outs of how the credit system works, there are many misconceptions about how credit reports and credit scores work. Instead of waiting until you need credit to understand it, brush up on the basics now with these resources:
- Best Tips to Improve Your Credit Score
- 7 Credit Score Traps You Should Avoid
- How Many Credit Cards Should You Have for Good Credit?
You can also send your credit questions to me at firstname.lastname@example.org. Let’s answer some that I recently received from Money Girl readers and podcast listeners:
Credit Question #1: Britt says, “After not paying my student loans for about 10 months, my credit took a rather large dip. But I’m paying on time now and using credit cards to make charges that I pay off in full. As a result, my scores have increased into the mid-600s but they seem to be at a stand-still. What can I do to increase them before I apply for a mortgage?”
I’m really glad that Britt’s finances are back on track. Making payments on any type of loan or line of credit that are 30 days past due will raise a bright red flag to creditors that you may be a credit risk.
Your payment history is the most important factor in how your scores are calculated because it clearly indicates how you manage credit. That’s why Britt's scores took a dive after becoming delinquent. Getting past due accounts caught up, or working out a new payment arrangement with the lender, is the best thing you can do for your credit.
The good news is that as negative information in your credit file ages, the less significant it is in the calculation of your credit scores, especially if you have many new positive transactions.
However, even after you get caught up, late payments don’t disappear from your credit history. They stay on your report for seven years and then the entire account falls off of your record. So once you have negative information on your credit report it sticks with you for a long time and will suppress your credit scores.
The good news is that as negative information in your credit file ages, the less significant it is in the calculation of your credit scores, especially if you have many new positive transactions. So make sure a due date never falls through the cracks and you continue to make every loan and credit card payment on time.
In addition to being consistent with payments and patient to allow time to work on your side, there are a few more tips and strategies I recommend. One is to carefully check your credit reports for errors and get any inaccuracies corrected as quickly as possible.
Another strategy is to carefully watch your credit utilization ratio, which is the amount you owe on revolving accounts—such as credit cards, home equity lines of credit, and personal lines of credit--compared to your credit limits.
Keeping your account balances below 20% of your credit limits (both on individual accounts and on the total of your accounts) is essential for building credit quickly. To learn more about managing your credit utilization, read or listen to these resources:
- Credit Utilization—What It Means for Your Credit Score
- 8 Credit Card FAQs and Tips to Build Credit
- 5 Ways to Get a Loan With Bad Credit
To cut your utilization ratio you can either decrease your outstanding balances on revolving accounts, request higher credit limits, or do both. Having higher credit limits is very helpful when you want to boost your credit scores.
So don’t cancel any credit accounts—even if you don’t use them! It’s better to keep your credit limits in place rather than closing accounts, especially when you might finance a big purchase in the near future.
To make sure a card issuer doesn’t cancel a card that you haven’t used in a while for inactivity, make occasional charges and pay them off in full to build a rich history of positive credit transactions.
To learn more about when you should or shouldn’t get rid of a credit card or other line of credit, don’t miss this recent post: Canceling Credit Cards—5 Questions to Ask Before Closing Accounts.
It's better to keep your credit limits in place rather than closing accounts, especially when you might finance a big purchase in the near future.
Managing your credit wisely in the months and years that lead up to buying a home or refinancing a mortgage is critical. Since a mortgage is one of the largest loans many of us ever get, there’s a lot of interest expense on the line. Be sure to read How to Prepare Your Credit for a Mortgage Approval for tips to get the best home loan possible.
Related Content: What to Know Before You Cancel a Credit Card