Credit can be a tool for many people. If you need to apply for a loan or credit card, lenders or card issuers will rely on your credit history in evaluating your creditworthiness and whether to proceed.
You probably have encountered your credit score at some point in such a process. This score is a three-digit assessment of your creditworthiness that has the potential to impact your financial health. Here are a few tips to understand your credit history and credit score for improving both.
First, there are three key things you can do to establish a positive credit history:
- Charge only items you can pay off in the current payment cycle to avoid paying interest on the remaining balance. Those interest payments add up throughout the year and can keep you from reaching other goals.
- Pay your bills on time – negative payments can significantly impact your credit score and cause it to decline.
- Try not to use more than 30% of your available credit. A high balance-to-credit limit ratio can negatively affect your credit score. Here is an example: If your credit limit is $5,000, aim to keep the balance under $1500, which would be 30%.
You can check your credit score to see how others assess your creditworthiness. A credit score is a three-digit number from 300 to 850 that constantly changes due to your credit history.
A score of 700 or above is considered good by many lending standards. You can request a copy of your credit score from the three major credit reporting companies: Experian, Equifax, and TransUnion.
Next, check your credit report once or twice each year to ensure there are no errors, review whether you’re paying your bills on time, and stay within your established credit limits. You can receive a free copy of your credit report once each year from AnnualCreditReport.com.
If you spot any errors, report the discrepancies to the appropriate credit bureaus (the report may differ among the three). They are required to take reasonable steps to correct any errors.
You can do several things to boost your credit score. The best ways to boost your credit score include
- paying your bills on time,
- decreasing the amount of debt you carry, and
- staying within your established credit limits.
Finally, if you are a first-time credit seeker and applying for a credit card or loan, you may have to establish your credit score first. You can do this in several ways, including getting a secured credit card or becoming an authorized user of someone else’s card. For example, parents of a college student may put their child on their credit card as an authorized user so that their student can establish their own credit score.
By overseeing your credit history and managing your credit score, you’re taking the steps that can improve your overall financial health.
