What is credit score? It’s a barometer of your financial health. The reading of this barometer is used to measure your credit worthiness. Its a measure of how well you managed your available credit in the past. A good credit score will ensure the following benefits for you.
- Lower mortgage rate and home equity loan rate
- Lower car loan rate
- Lower insurance premium
- Better employability
- Better acceptability as a renter
- Better rate on your credit cards.
If we quantify all these, we are talking about saving 1000’s of dollars worth of saving in our life time. Credit score affects our finances. Whether you buy or rent, a good credit score enables you to save money either ways. Below are few immediate steps you can take to build and maintain an excellent credit score.
Check your credit report
In case you don’t know, you are actually entitled to one free credit report every year. You can get it from TransUnion, Experian, and Equifax. These are our U.S. credit bureaus. Have yours printed and delivered into your doorstep.
There are plenty of reasons why you need to do this. First the document gives you an overall picture of your financial health. Are there loans you haven’t paid faithfully yet? Second, errors in credit report can have a profound impact on your score. Just imagine, a loan you’ve already paid off is still listed there as unpaid. That’s going to be disastrous. It takes a while before the bureaus can correct such mistakes since they need to perform their own investigation, so the sooner you can catch them, the better.
Pay your bills on time
I couldn’t stress this enough. Don’t wait for a couple of days or next week or worse next month before you settle them. Even if you pay the amount within the grace period, it sends a very wrong message to the creditor: you’re having trouble paying the bill or you’re an irresponsible debtor.
Perhaps you have several bills to think about. If you’re struggling with this, you can do something I did. I automated them, especially my credit card bills. Once they are due, they are allowed to collect the amount from my authorized bank account. This way, I don’t have to always remember my dues. Since almost all banks now allow online banking, I can just check the debited account no matter where I am.
Talk to your creditor
Once in a while you find yourself in hard times, and your finances are enough for other important bills. If you really cannot pay your debt right now, make sure you can talk to your creditor about it. Of course, you can’t expect them to be happy or cancel your debt, but a lot of them are open-minded enough to give you a grace period with perhaps a small amount of penalty or none at all. They will appreciate your honesty and commitment to pay off your debt.
Don’t go for the minimum
If you have the funds to pay off all your credit card debt for the last month, then do so. Don’t settle for the minimum. Keep in mind that whatever balance is left for the month is carried over to the next and is charged the same interest rate. So if it gets carried over many times, it’s also charged several times. Before you know it, it becomes a lot harder to end your credit card debt.
Don’t save yet
I already mentioned this in my previous article about coping with financial failures. If you have a pile of debt staring at your face, saving money for the future is illogical and impractical. Consider paying all your debts first, so you don’t get to touch your future savings.
Ask help from the experts
I always stress the importance of having allies with you, particularly if it’s about financial health. Get rid of the notion they’re just after your money. I’ve seen many who are so dedicated in what they do; they simply want to help you. You can even just buy a good book and read and follow the tips, if you’re too shy to talk to someone.
Consider other methods of paying debts
Financial counselors can present you a couple of ideas so you’ll be able to pay more debts in just a short time. One, you can mortgage refinance so you can take advantage of a lower interest rate and longer payment terms. You can also consider debt consolidation, combining all your debts and pay only a few obligations later. Some would even tell you to set up garage sales and sell stuff you don’t need. We once helped a friend do this, and for only a few days, his funds could cover two mortgage payments.
Don’t worry if you have a bad score. A bad credit score may be harmful, but that doesn’t mean it’s something you can’t fix. Just remember the tips I’ve given you, and hopefully, things will be better real soon. Also read How to improve credit score during hardship.
Jai Catalano says
Yes pay your bills on time. Or better said just pay your bills. I have never paid a finance charge on a cc. Not bad huh!
Not bad at all! this is the way everybody should go.
Kurt @ Money Counselor says
Very good advice, and it’s a lot easier to maintain good credit than to restore bad credit!
One other tip: Americans can get one free credit report annually from each of the three reporting bureaus, Experian, TransUnion, and Equifax. It’s a good idea to get reports from each, because there can be differences. One thought: Get a free report from one of the three every four months, and cycle through the rotation so you’re getting the one free report annually from each to which you’re entitled. And getting a report every 4 months boosts the chance you’ll catch on to any potential identity theft sooner rather than later.
Eric J. Nisall - DollarVersity says
I would have to disagree about not saving while paying off debt. While everyone will have a different view on the subject, I think that it is important to always to to save a little regardless of what the disparity in interest rates may be. If an emergency does come up, at least there will be some cash to cover it, and there need to add even more debt on top of what has already accrued will be removed from the equation.
Doing a refinance, just like doing a 0% interest balance transfer is very unlikely if the debt situation is bad enough. The credit will most likely be shot, thereby nullifying any potential interest saving offers, or even being given ANY new credit for that matter.
I agree with you. I think that it is important to save something. That little cushion you have will save you should something happen while you are paying down the debt. Otherwise, you will have made all of this progress, have something happen, and have to charge the $1,000 because you didn’t have any savings.
William Wei says
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Paul @ The Frugal Toad says
Employers look at a credit score as evidence of responsible behavior so it’s important to take care not to harm it. Good information SB!
Thanks Paul. Credit score definitely reveals your responsible behavior in the past.
Barbara Friedberg says
Just bought a condo, and we worked assiduously to keep our score really high these past few years. It worked and we got a great rate. If you know the metrics, it’s not too hard! Using only a portion of available credit I find an unusual criteria.
Serena Hearne says
Surely out of the points mentioned in the article, none can be more important than paying your bills on time. However much you adhere to anything else, if you don’t pay your bills on time then your credit score can never improve.