The average credit score is around 687. If yours is less than perfect, don't fret. There are proven methods to help you fix your credit and raise your credit score.
Credit cards can be used as a tool to manage your finances, and simplify your spending habits. They can also be a source of great financial devastation if you rack up too much interest. The key to using credit to your financial benefit is developing habits that make it easy to avoid paying high interest rates or racking up debt that you cannot pay off.
First and foremost for rules of credit, consumers should not charge more than they can pay at the end of the month. If you don’t pay it off in full at the end of the month, you end up in a revolving cycle of credit, paying interest on interest and racking up debt. Moreover, if you leave a balance on your card, interest accumulates on every month’s balance. If you pay everything in full at the end of the month, you avoid paying interest and simply have the card to use for security and simplicity. Smart habits can put you on the path to 800+, raising your credit score every single month.
Benefits of Credit Cards
One of the big benefits of credit cards in the modern world is the security that they can offer you. Opposed to a debit card, a credit card is much easier to recover if there are fraudulent charges or identity theft. Often all it takes is a call to credit card companies, whereas a bank with your checking account can take weeks and often doesn’t rally for your protection the way a credit card company does.
Another advantage they offer customers is the rewards that many of the better cards offer, for travel or shopping, and sometimes, even cash back. These benefits can really add up so long as you stay in good standing with your credit card company.
For many, an important use of credit cards is the ability to build credit. When applying for bigger loans, or a mortgage, your credit score is hugely influential to what you end up paying overall and your ability to be approved for a loan. That’s why it is essential to build and maintain good credit.
Your credit will arguably have THE greatest impact on your financial life. Period.
Assume you borrow $200,000 for a 30-year mortgage. If you have a 4.384% interest rate, you’ll pay a total of $360,000 over the life on the loan. If you have bad credit and get a 5.973% interest rate, you’ll pay a total of $430,000. That’s a $90,000 difference, all from being a responsible borrower.
Sound good? Let’s start with the basics. You must be familiar with these two things: your credit score and your credit report.
Your credit score represents your credit risk to potential lenders. Lenders will take this number (which ranges from 300 to 850), along with some more info (such as your age and salary), to decide if they want to lend you any money. If they decide to lend you money, they’ll give you a higher or lower interest rate based on how much of a risk they think you are.
What does your credit score include?
- 35% = payment history. This shows lenders how reliable you are, and late payments WILL hurt you.
- 30% = amounts you owe. This includes your credit utilization rate, which is essentially how much debt you have vs. how much you have in available credit.
- 15% = how long you’ve had credit.
- 10% = the age of your accounts. Older accounts are better because they show lenders
- 10% = types of credit. Do you have all credit card debt, or do you have a mortgage and student loan too? Varied types of credit is better.
Your credit report tracks all of your credit-related activities, with recent activities getting more weight than older activities.
Your credit report includes the following:
- A list of all your credit accounts.
- Basic identification information.
- The amount of your loans.
- Your credit history. This shows who you’ve paid, how consistently you’ve paid them, and if you’ve had any late payments.
- Any credit inquiries. This is separated into voluntary and involuntary. You know those “pre-approved credit cards you get in the mail? Those are involuntary, so they won’t hurt your credit. However, if you have too many inquiries, or “hard pulls”, it will hurt your credit.
If you’d like to save thousands of dollars over your lifetime, all you have to do is develop a great credit score. Here are the six credit card rules you MUST follow to get good credit.
1. Pay off your credit card regularly, and in full if possible.
If you take away nothing else from this article, please understand that you must pay off your credit card regularly. Your payment is history is the biggest chunk of your credit score. So if you miss even one payment on your credit card, your score can plummet, your APR can skyrocket, and you’ll be charged a late fee.
2. Keep your cards active.
Do not cancel your credit cards unless you absolutely have to. You also shouldn’t close your accounts if you are applying for a major loan within six months. The reason is because you want as much credit as possible when you apply.
Here’s a quick “life hack”: if you feel like you won’t be using a credit card, instead of cancelling it, set up automatic payment and link it to your bank account. Then make one small purchase on this card per month. Your credit utilization ratio will be low and your credit score will be boosted from your consistent payment history. It’s even better if you just link up a subscription service, such as Netflix, to this card with automatic payments. You can set it and forget it!
3. Negotiate a lower APR.
The average APR is around 15%, so if you are an above-average borrower and you’re paying more than 15%, call your credit card company ASAP. Tell them that you’re a responsible borrower who pays the full amount of your bill on time (of course, only tell them this if it’s true). Tell them that there are many credit cards out there that offer your better terms than what you’re currently getting. You’ll get a lower APR about half the time, but it’s better than not trying. After all, credit card companies will rarely ever lower the APR on their own – they’re getting too great of a return.
4. Get more credit.
Here’s another reason to get on the phone with your credit card company. You should ask for more credit! All you have to do is call them and ask for a credit limit increase. Some companies might do a credit inquiry, which will dock your credit score a couple points, but the increased credit will outweigh any hit you take. If your income has increased, you should DEFINITELY ask for a credit increase. The reason you want to get more credit is to improve your credit utilization rate, which makes up 30% of your credit score.
5. Don’t make just the minimum payment.
Interest charges on a credit card can be as high as 30%, while a minimum payment is between 2-5% of your cards balance. By manipulating these numbers, creditors send the message that it’s okay to pay just the minimum balance, which is how they get richer and richer. Even a few extra dollars per month can have a tremendous impact on the lifetime cost of borrowing.
Do you have any credit card tips you’d like to share? Tell us in the comments.