“Bad Credit? No Credit? No problem, your job is your credit!” scream shady used-car salesmen. Unfortunately, that’s not true. Bad credit is a problem. It makes your life more expensive in the form of higher interest rates on loans. Bad credit can make it harder for you to rent an apartment and can even keep you from getting your dream job.
Your credit score is a widely misunderstood measure of your cash flow health and financial habits. It’s possible to have a great credit score and terrible overall financial health and vice versa. Credit scores range from 300 to 850, the higher your score is, the better.
The way your credit score is calculated is bit of a mystery, but we do know some of the factors that contribute (or detract) from your credit score.
Credit Score Building Blocks
• Length of time you have been using credit
• How much debt you have
• How much credit you have available to you
• How often your payments are made on time or late
Source: Experian (a credit rating agency)
Yes, the length of time you have had credit is a contributing factor to your credit score. It’s a little bit of a chicken or egg argument and can prove particularly tricky for young people or people who are trying to establish credit.
On the flipside, you may already have strong credit. Perhaps someone in your life who is struggling with their credit has asked you to co-sign on a loan or rental agreement. Remember, if you co-sign on a credit application you are fully responsible for that debt. Do not co-sign on any loan or credit card that you are not fully willing to pay back.
How can you boost your credit score?
Despite what for-profit “credit repair” agencies will tell you, there is no secret to repairing your credit score. I do have some simple tips that you can implement to help maintain or improve your credit.
• Always pay your bills on time.
If this is something that trips you up, the easiest way to make sure this happens is to set up an automatic payment for your bills. This saves you time and may save your credit score.
• Pay off your credit card debt but don’t cut up your cards.
It’s popular among some anti-debt personal finance personalities to have people cut up their credit cards after they’ve paid them off. If you want to cut up your card physically that’s fine. However, don’t cancel your cards. Remember, the length of time you’ve had a credit line open feeds into your credit score.
• Don’t open a lot of credit cards in a short period to try and boost your score.
This may be interpreted as a sign of financial crisis and actually hurt your score.
• A secured credit card can help you establish your credit.
If you’re struggling to get started, talk to your local bank or credit union about a secured credit card. When you open a secured credit card you open a savings account at a bank and the bank issues you a credit card to use that’s tied to the savings account. Once you have responsibly used the credit card for a year or so, it will convert to a regular, unsecured credit card and your savings account will be released back to you.
What does “responsible credit use” mean?
• On-time payments
• Don’t charge above your credit limit
• Use the credit card and pay off the balance monthly
With consistent responsible credit use you can build or rebuild your credit score. Building up your credit score isn’t always easy, but it’s worth it.