A good credit score is a ticket to many opportunities. Whether you’re planning to buy a home, finance your education, or want to get a mortgage.
Lenders, insurance companies, landlords, and employers often use credit information to gauge reliability and responsibility. Poor credit can indicate that you’re a risky choice.
So, learning how to build and maintain good credit can make a huge impact in your finances. But first, let’s understand the basics.
What is a Good Credit Score?
A credit score is deemed good if it is within a specific range, based on the scoring model. The FICO score, which is the most commonly used, has a credit score range of between 300 and 850. Credit scores fall under five categories as follows:
- Poor credit: Between 300 and 579
- Fair credit: Between 580 and 669
- Good credit: Between 670 and 739
- Very good credit: Between 740 and 799
- Excellent credit: Between 800 and 850
Many consider a score that is above 670 to be “good credit.” So, why does having a good score matter?
Why is a Good Credit Score Important?
A credit score that is “good” is beneficial for several reasons.
Quick Loan Approvals
Good credit helps you get approved for loans and credit cards quickly. Lenders inquire about your credit to determine if you’re a reliable borrower. With a good score, you’re more likely to get the green light and access the funds you need.
Saves You Money
Since you qualify for lower interest rates on loans and credit cards, you’ll pay less in interest over time. This can add to significant savings, especially with big loans like mortgages or car loans.
Affects Where You Live
Your credit score affects more than just borrowing. Landlords also check credit scores when determining whether to rent to you. A good score can make it easier to find a place to live.
Determines Your Insurance Premiums
Your credit score is useful information for insurance companies. They use it to determine your premiums. In fact, a good score can easily lead to lower insurance costs.
Impacts on Your Employment Process
Lastly, some employers check credit scores as part of their hiring process. A good score can show that you’re responsible and reliable, potentially giving you an edge in the job market.
How to Build a Good Credit Score
Building a good credit score is a gradual process that relies on consistent and responsible financial habits. Follow these essential steps to improve your credit score effectively:
1. Maintain a Mix of Credit Types
A mix of credit accounts, such as installment loans like a mortgage or a car loan and credit cards (revolving credit), demonstrates a responsible borrower to lenders. This is because you can manage different credit types. And it can have a positive impact on your credit score.
2. Keep Credit Card Balances Low
High balances compared to your credit limit can lower your score. In fact, aim to utilize not more than 30% of your credit limit.
Paying off your monthly balance minimizes interest charges and maintains a healthy credit utilization ratio.
3. Keep Older Accounts Open
The length of your credit history is crucial in determining your score. When you close old accounts, you shorten your credit history, potentially negatively affecting your score. Keep older accounts in good standing to maintain a longer credit history.
4. Be Timely with Paying Your Bills
Your payment history accounts for up to 35 percent of your score. Therefore, timely payments are critical for maintaining a solid credit score.
To easily achieve this, the ideal solution is to set up automatic payments or reminders to ensure you get all the due dates.
5. Limit the Hard Inquiries Requests
Too many credit hard inquiries within a short period can lower your score. Try to minimize these inquiries by only applying for credit when necessary and avoiding excessive credit applications. If you’re working on building good credit, waiting three to six months between credit card applications is a good idea.
6. Consolidate Your Debts
Consolidating your debt involves merging several debts into a single loan, often with a lower interest rate. This helps to simplify your payments and potentially reduce your monthly expenses. By consolidating, you can manage your debt more efficiently and pay it off faster.
7. Regularly Check Your Credit Report
Credit report errors impact your credit score negatively. Therefore, obtain an annual credit score for free from each of the major credit bureaus—Experian, TransUnion, and Equifax—and dispute any inaccuracies you find to ensure the accuracy of your credit information.
How Long Does It Take to Improve Your Credit Score?
There’s no fixed number of points by which your credit score will improve each month, nor a guaranteed timeline for seeing progress. This time depends on the reasons it’s low in the first place.
If high credit utilization is the main issue, paying off your balances can lead to a significant improvement in just one month. However, if your credit score is low due to multiple collections and a history of missed payments, it will take several months of consistent, on-time payments to see noticeable progress.
How to Maintain a Good Credit Score
Building a good credit score is just the beginning; maintaining it is vital to enjoy the benefits of good credit. So, how do you keep your credit score high?
It’s simple: stick to the responsible financial habits that got you a good score. Maintaining a good credit score is often easier than building one, but don’t get complacent.
Avoid habits that can quickly hurt your score. Stay vigilant and keep practicing those good habits to keep your credit score high and monitor your credit to track progress.
Conclusion
As society increasingly relies on credit for purchases and financial decisions, a solid credit score is crucial for economic stability and opportunities. Achieving this score requires consistent, responsible habits. Maintaining it demands ongoing commitment and vigilant credit report monitoring. This paves the way for lasting financial success and stability.
