Now more than ever, credit plays a pivotal role in your financial picture. From taking advantage of business and homeownership opportunities to functioning on a day-to-day basis in an increasingly online and cashless society, being able to borrow money has become a fact of life for many people – either for the very short term, like floating a purchase on a credit card, or over several decades, like taking out a home loan.
Here at CredEvolv, we understand why some folks have apprehensions about going into debt for any reason. The pitfalls associated with borrowing money can be plentiful. And usually when someone begins utilizing our platform, it’s because they’ve already experienced a few of them (or they know someone who has). More often than not, people run into trouble with credit because they simply didn’t know what the pitfalls were.
The helpful hints in this blog are for everyone, whether you’re just starting to build your credit history or looking to maintain a healthy credit score going forward. Understanding the fundamentals of credit can make a significant difference in your attitude about borrowing money, your ability to manage debt wisely, and the benefits you can enjoy by being a smarter borrower.
Here are six essential tips to help you avoid credit trouble before it starts.
1. NEVER make a late loan or rent payment.
We put NEVER in all caps for a reason. The most critical factor in maintaining a good credit score is your history of making on-time payments, which carries the most weight (35%) when your score is calculated. Even one late payment can have a severe negative impact on your credit score and can stay on your credit report for years. Whether it’s an installment loan, credit card bill, or rent payment – yes, there are services that can add these to your credit report – always strive to pay on time. Set up reminders or automatic payments to ensure you never miss a due date. Under no circumstance should you adopt the attitude that “the late fee isn’t that much, so I’ll just pay it and play catch up on my payments next month.”
2. Don’t max out your credit cards.
Your credit utilization ratio, which is the amount of credit you’re using compared to your total credit limit, plays a significant role in your credit score, counting 30% toward your score’s calculation. The general recommendation is to keep your overall credit utilization between 25%-35% of your total limits (or less) to maintain a healthy score. Maxing out your credit cards can signal financial irresponsibility to lenders and negatively impact your creditworthiness. If possible, pay off balances in full each month to avoid high interest charges and keep your utilization low. Also try to resist any offers to increase your credit limits unless you absolutely need more borrowing power.
By all means, educate yourself on these concepts to make informed financial decisions, but be careful about DIYing your credit improvement efforts.
3. Don’t close credit card accounts.
This one seems counterintuitive, because many people think less is more when it comes to their credit (like with the credit utilization ratio we just discussed). However, closing credit card accounts, especially older ones, can reduce your available credit and negatively impact your credit utilization ratio. If you have a credit card with no annual fee and a positive payment history, consider keeping it open, even if you’re not actively using it. Keeping accounts open for a longer duration can also positively impact the average age of your credit history, another factor that counts 15% toward calculating your credit score.
4. Don’t apply for credit too often.
Store credit cards, airline miles credit cards, cash back credit cards – you’re probably bombarded with offers that all seem to have great benefits, so why not go for every one of them? Remember, each time you apply for credit – whether it’s a credit card, installment loan, or mortgage – a hard inquiry is placed on your credit report. Multiple inquiries within a short period can lower your credit score temporarily, because the number of recent inquiries counts 10% toward the calculation of your credit score. Be strategic about applying for credit and only do so when necessary. Research and compare offers beforehand to choose the best option without making multiple applications.
5. Think twice before co-signing someone else’s credit application.
At CredEvolv, our whole business model is based on helping people. But in your case, when it comes to co-signing a loan or credit application, you should do so with caution. Why? Because you become equally responsible for the debt. While co-signing can help someone else get approved for credit, it also means you get dinged if that person doesn’t make payments on time. Before agreeing to co-sign, be as certain as you can possibly be that you trust the individual’s ability to manage credit responsibly. Also make sure you completely understand the potential implications for your own credit score and financial health, which leads us to our final tip.
6. Don’t start or continue your credit history without first understanding how credit works.
Understanding the basics of credit — such as how interest rates work, the impact of late payments, and the importance of credit scores — is crucial before you start or continue using credit cards or taking out loans. By all means, educate yourself on these concepts to make informed financial decisions, but be careful about DIYing your credit improvement efforts. Consider seeking advice from the nonprofit credit counselors on the CredEvolv platform if you’re unsure about any aspect of managing credit.
Conclusion
If you’re just getting started on your credit journey, you can significantly reduce the risk of encountering credit trouble and pave the way for a healthy credit profile by following these six fundamental tips. If you’re already run into a bit of trouble and are seeking help, keep these tips in mind as you move forward with a nonprofit CredEvolv counselor.
Remember that responsible credit management not only impacts your ability to borrow money in the future but also plays a role in securing favorable interest rates, lower insurance premiums, and even promising job opportunities. Start building good credit habits now and stay informed about changes in your credit report and score to maintain financial stability and achieve your long-term goals. With careful planning, discipline, and a little help from CredEvolv when you need it, you can navigate the world of credit successfully and avoid common problems along the way!