If you’re living in the United States, you need to build and maintain good credit to maintain a good credit score. Your credit score is something that lenders, landlords, and even employers will review to assess your financial stability.
Let’s take a look at five things that can make a big difference not only in your credit score, and therefore affect whether you will be seen as a responsible consumer who can manage their money – and their debts!
Use no more than 30% of your credit card limit(s)
Take a look at your most recent credit card statement. There will be an entry on it marked “Credit Limit.” This is the maximum amount that the card issuer will allow you to charge on your card. But to be a truly responsible credit card user, you should not charge more than 30% of that number. And the lower the better.
Why? This is called your “credit utilization” rate. It suggests how responsible you are with your money. If you max out your card, and then make minimum monthly payments, there is no room for an emergency expense, like a big medical bill or a major car repair. This demonstrates irresponsible, risky money management, and it is very bad for your credit score.
The best solution is to charge no more than you can afford to pay off every month. A zero balance is a beautiful thing, especially for your credit score!
Pay your bills at least 3 days in advance
We all know what a due date is, when it comes to bills. It’s the date by which your payment must reach the issuer of that bill. It is NOT the date on which you should be sending it out!
It takes time for a bill payment to reach a creditor, whether you put it into a mailbox or use an online bill-paying method. And it is very important that your payments arrive on time. Late credit card payments can cost you money in late fees and extra interest charges. They can also hurt your credit score, by showing your credit utilization as higher than it would be if you paid on time. And if you are skating close to your credit limit, a late payment could put you over it, which is a bad thing in many different ways!
It’s hard to predict how long each bill will take to be processed, from the time you send it. To be completely safe, try paying a week ahead. That should be plenty of time for your payments to arrive early and without any penalties, to your wallet or your credit score!
If you are trying to build up your credit score and you need a car, getting an auto loan is a great way to do it. Once you have received the loan and have made several payments on it, this will fortify your credit history, giving you a record of making a significant payment over a prolonged period of time. This is great for your credit score.
Be sure that you will be able to make all of the monthly payments that the loan requires. Under no circumstances do you want to make late payments, or default and have the car repossessed. That would be very bad…
While your application for the loan will add a hard inquiry to your credit report, this will be more than made up for by your positive payment history during the term of the loan. So go for it!
Lendbuzz specializes in car loans for visa holders with little or no credit history. You can apply and get a rate in minutes.
Maintain a healthy level of debts to assets
When a lender is making a decision on whether to give you a credit card or a car loan, they will make a few calculations that will tell them how well you will be able to make the monthly payments. A key formula that they use is called the debt-to assets ratio.
The debt-to assets ratio is calculated by starting with an inventory of all of your long-term debt. This includes:
- Mortgage or rent payments
- Credit card payments
- Car payments
- Student loan payments
- Other monthly bills
Next comes a calculation of your total assets. This category would include things like:
- Gross monthly income
- Stocks, bonds, and other assets (if you have any)
Then you simply divide your total monthly debt by your total monthly assets. If you have $2,000 of debt and $5,000 of assets each month, then your debt-to assets ratio is 0.4. Generally speaking, the lower your ratio the better, especially if you are planning to apply for a loan. Most lenders prefer to approve loans to consumers with ratios of .35 to .45.
Know the difference between a soft and hard query
A query, also known as an inquiry or a pull, is the term for when your credit is checked by a potential creditor. There are two varieties: soft and hard.
A soft query usually happens without your knowledge. These are done by the companies who mail you credit card or loan offers. A soft query is done simply to pre-qualify you for the offer. A prospective employer may also do a soft query to make sure that you are a financially responsible person. A soft query will not affect your credit score.
A hard query, on the other hand, should not happen without your consent. It is usually made as a consequence of your applying for some type of credit. While a hard query will become part of your credit report and may temporarily knock a few points off your score, multiple inquiries around the same time (usually from shopping rates among several lenders) will not be counted as additional queries. This is not a problem if you have very good credit, but those with marginal credit scores should minimize the amount of hard queries they cause.