There is no crash course on how to maintain a credit score. We often start off our credit history journey with a credit card and maybe a car loan. No one really explains the best way to use these products and how to also ensure your credit history stays healthy. You’re almost always on your own, when it comes to weaving your way through the forest of banking, credit, maintenance and more. Unfortunately, many people often learn about their credit history when it is already too late and their credit score has dwindled down to almost nothing.
My career, thus far, has taught me that one of the most important things to have in your adult life is a good credit history. Your credit score will follow you wherever you go. It will determine whether that home you dreamt of will be yours, whether that travel credit card you wanted is approved, whether that car you wanted to finance can be driven by you and so much more. If properly maintained, your credit score will do wonders for you.
“One of the most important things to have in your adult life is a good credit history”
Here are the top 5 tips to ensure your credit score stays top notch quality.
1. Timely Payments
Paying before the deadline is a must. Showing the bank you are punctual and can be trusted is the first step to earning your credit history respect. If a payment is past 30 days late, it will show in your credit report and this fact will stay there for up to 7 years. Late payments will affect your credit score because it shows you are, as a borrower, not reliable, take on more risk and there is a higher chance the new amount borrowed will not be paid back.
2. Avoid Too Many Credit Applications
Sure we all receive mail-in offers of pre-approvals, credit limit increases, special offers etc. However, once you approach the bank regarding these offers, turns out there is a credit application involved and it’s not guaranteed it will be approved. Accepting all the credit offers will mean having many credit applications under your name. Too many credit applications will hurt your credit score because it shows you are constantly looking to borrow more. Borrowing often means there is more credit accumulating under your name, which you may spend and potentially not pay back. It’s recommended to have no more than 2 credit application every 6 months.
3. Avoid Consistent High Balances
If your credit card limit is $5000, doesn’t mean the amount owing should be $5000. The limit is there for emergencies and larger purchases. On a regular basis, it is recommended to spend no more than 80% of the credit limit. In the $5000 limit example, the amount owing should not be more than $4000.
A credit card is a revolving credit product, meaning it should be paid off on a regular basis. It is recommended to have the credit card paid down to a zero on a monthly basis. This recommendation goes for any revolving product, such as a line of credit, home equity line of credit, and business line of credit. Showing the bank that your credit balances are consistently paid off will qualify you for more credit in the future.
When it comes to your credit products, whether it’s the credit card, line of credit, overdraft protection etc. spending the amount available must be thought through. If your spending habits result in high credit usage and consistently high owing balances, this will show that you are dependent on the credit and rely on the balance available to sustain a living.
The bank will see this as a potential red flag, because there is a high chance you are spending more than you have. Spending more than you have may create extra debt, which you may not afford to pay back. For these reasons, many banks have certain restrictions, such as debt to income ratio calculation, to restrict clients from borrowing more than they can afford.
5. Avoid Too Many Credit Products
I once met a couple who had 12 credit cards, 9 of which they never used or even knew about! Every time they walked into a store, a clerk would offer them a “special, limited time only membership credit application” where they can collect points, redeem the points for discounts and so on. This couple would apply every time they were approached. Eventually, they had so many credit cards and credit products in general, that they noticed their credit score dropping. As mentioned previously, your credit score can drop from having too many credit applications, but it can also drop from having too much open credit.
Open credit is having credit products that are not being used, however are available for use. Open credit is risk exposure to potential debt. If the couple has 9 credit cards, and each one has a $5000 limit, that means having $45,000 of available open credit, free to be used any time. When applying for a major credit product, such as a mortgage or a car loan, the bank may potentially ask the couple to close down these credit cards to reduce the risk exposure.
The above 5 guidelines will ensure your credit score stays top notch, the trick is to create good habits and live by them when it comes to your credit products!