It’s unfortunate, but one thing we’re not really taught much about in school is personal finance. In particular, we’re left to learn for ourselves how to deal with building and maintaining a good credit score.
The importance of having a good credit score can’t be overstated. Just to name a few, your credit score is going to affect everything from your ability to rent a place, to get a cellphone, and ultimately to buying a home.
Let’s get into some of the best ways you can ensure that you have the best possible credit score.
Don’t apply for too much credit
When you apply for credit, such as a credit card or auto loan, the lender will generally pull your credit report in order to determine if they are willing to give you the loan or line of credit. This is pretty straight forward. One thing you might not know, however, is that every time your credit report is pulled by a potential lender what’s called a “hard inquiry” is logged on your credit report.
A hard inquiry on your credit report indicates that you’re applying for some type of credit. It’s important to keep in mind that your credit score is negatively affected when you have too many hard inquiries in a short period of time. Generally, more than two hard inquiries are considered enough to negatively affect your credit score.
Therefore, it’s not wise to apply for too much credit at once, but rather spread it out over a few months. The good news is that hard inquiries usually fall off your credit score after a year.
Keep your credit card balances low
There is an important concept to grasp when it comes to understanding how your credit score is calculated. Credit utilization basically means the balance-to-limit ratio on any particular credit score.
In other words, how much credit are you using compared to what’s available. For example, if you have a credit card with a total credit line of $1,000 and your balance is currently $500, the credit utilization on that credit card is 50%.
Credit utilization is important because when your credit utilization starts to get too high on a credit card, it will negatively affect your credit score. When your balance begins to exceed 25% of the available credit on a credit line, you’ll start to see your credit score drop.
Therefore, it’s best to pay down any credit cards so the balance is under 25% and make sure that your credit utilization remains under 25% on all of your credit lines.
Remove negative items from your credit report
Negative items on your credit report are by far the greatest cause of a bad credit score. Negative items such as collections, late payments, and charge-offs can completely ruin your credit. To make things worse, these types of negative entries can remain on your credit report for up to 7 years. The good news is that you can remove collections from your credit report.
The easiest way to remove negative items such as collections and late payment is to write a letter to the original creditor explaining why you didn’t pay the debt and ask them for a goodwill adjustment. This technique can be very successful in removing negative items.
Pay down your installment loans
Installment loans including loans such as student loans and auto loans. Having these types of loans on your credit report won’t hurt your credit score, but you can increase your credit score by significantly reducing the balances.
Paying off debt is a time-consuming process so it will take some time, but when your installment loans begin to have smaller balances, you’ll see an increase in your credit score.
Consider getting a mortgage when you’re ready
Lastly, when you’re ready, getting a mortgage loan can greatly increase your credit score. There are a couple reasons for this. First of all, one thing that’s taken into account when your credit score is calculated is the different types of loans you have. When you have a mix of different types, such as credit cards, student loans, and mortgages, it will result in a better credit score rather than if you just have a credit card. Additionally, because mortgage loans are usually large loans and lenders do their due diligence before granting the loan, it’s generally considered positive when you have a mortgage loan on your credit report and will result in a higher credit score.
Additionally, because mortgage loans are usually large loans and lenders do their due diligence before granting the loan, it’s generally considered positive when you have a mortgage loan on your credit report and will result in a higher credit score.
Ryan Greeley is the author of The Better Credit Blog, a website dedicated to helping people improve their credit.
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