It's really crazy how often we get ourselves into trouble by failing to simply use our common sense. Who hasn't been told in their life one time or another "Don't count your chickens before their hatched," "It's better to be safe than sorry" or "Don't bite the hand that feeds you?" When it comes to finances, there is no shortage of common sense advice on prudent savings and investing, from "A penny saved is a penny earned" to "Don't keep all your eggs in one basket."
All of use have been given advice on just about any conceivable situation or scenario we are likely to face in life, except when it comes to one of modern life's mysteries, such as: credit scores, credit reports, and credit cards. If you ask, most people haven't a clue about how credit really works or how it affects our chances to buy a home, car, or open our own business. We receive no advice from our parents regarding this matter, yet credit and more particularly our credit history/ credit scores and credit reports impacts our everyday lives, from the way we live to the decisions we make.
While most people understand it is advantageous to have a good credit score, going about achieving and maintaining good credit is one of the rare instances where there isn't an abundance of good advice available. The key to doing so comes down to simply exercising good, old-fashioned common sense. Ways to Keep a Good Credit Score
Always pay your bills on time. While it might seem a rather basic piece of advice, this is by far the most important key to maintaining good credit. Failing to pay on time and as promised, according to Evelyn Chase, a Denver-based CPA and personal finance consultant, is the number one "negative factor" reported on individual credit reports.
"While non-payment of obligations is more of a negative factor and will result in worse damage to one's report, paying debt obligations late is still a close second in terms of how it adversely affects individuals' credit reports," she says.
Chase suggests that you take advantage of automatic payments and other online bill payment strategies offered by lenders and credit card issuers in order to ensure payments arrive on time. If you do forget to make a payment, she suggests you promptly notify the creditor and quickly act to rectify the situation. Whatever the situation, she warns that you don't ignore creditor notices regarding late- or non-payments. This only makes the situation worse in the long run.
Always build a strong payment history. Late and non-payments are two of the most common items that are reported to the credit agencies, yet they are the two factors you have the most control over. You can avoid this by making payments on time every month to help keep a good credit score. Another key to building a strong credit history includes paying off large credit card balances "in full" each month, which conveys a sense of responsibility for your debt obligations. A good way to implement such a strategy is to begin charging everyday living expenses on your credit card. After doing so, at the same time deduct the charged amount from your checking account and then pay off the monthly credit card charge in full each month.
Always limit the number of cards you carry on you. This will help you to use your credit cards wisely and reasonably. As a general rule of thumb, you should limit yourself to 3 or 4 cards at all times. This number allows some flexibility in your spending (use of specific cards for specific spending) while allowing you to maximize perks or benefits (points, cash back, rewards, etc.) associated with many credit cards nowadays. Maintaining a large collection of cards is likely to hurt your credit score.
Try to limit the amount of overall credit you use at all times. A key consideration for creditors is an individual's debt-to-income ratio, which measures one's ability to meet their debt obligations. As such, excessive loan balances slant the ratio, such as: school loans, car loans, and credit card debt.
This will be negatively impacting your credit score in a major way. To avoid this, pay down existing loan balances as quickly as possible and make it a habit to limit the number of credit card and loan accounts you take out. Always avoid maxing out your available credit limit whenever possible. Another key consideration for creditors is the percentage of credit available that you are using. Maxing out available credit limits lets perspective creditors think that you are not using your available credit wisely or appropriately. In turn they are likely to be overextended with regard to your debt load.
In either case, your credit score will be severely damaged and potential creditors will be less likely to offer credit with good terms. A good rule is to keep balances at less than 30 percent of the available credit line. Even if that is not possible at any given time, you certainly don't want to exceed 60 percent on the high end, as doing so will drive down your credit score and send up red flags to potential lenders.
Always limit the inquiries you make on your credit report. There are numerous situations where a company will request a copy of your credit report/credit score from one of the national reporting agencies. According to Chase, these can include companies with whom you're requesting credit, insurance companies, contractual service companies, utilities companies, potential employers, etc. When such a request is made, a credit inquiry will generally be recorded on your credit report by the agency who received the request. Too many such inquiries within a very short period of time will drive down your credit score. You should always review your credit report annually. Errors within credit reports have always been a problem, and they happen all the time, more than you know. Ultimately, it is up to the individual to monitor their reports to ensure the information listed on the report is accurate. Wrong or missing information can cost an individual in the form of denied credit or credit offered at higher rates than the individual might actually merit.
Chase also suggests more frequent monitoring to guard against identity theft and/or flatulent activity. Unlike a lost or stolen credit card, where you know there might be a problem, identity theft can go on undetected for months or longer in certain situations. The longer the identity theft continues undetected, the worse damage is inflicted upon the victim's credit score, which can sometimes take years to clear up.
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