A high credit score is just as important as other cornerstone financial tips, such as paying down debt and building an emergency fund. Your credit score affects your ability to achieve big milestones such as buying your first home or car, but it can also impact less obvious things like insurance premiums or your ability to secure an apartment for rent.
Later, we will discuss tips to help you recover from bad credit. First, let’s discuss the benefits of a good credit score.
4 Benefits of Having a High Credit Score
The entire premise behind a high credit score is that it shows potential lenders that you are fiscally responsible and they should, therefore, grant you loans and other financial perks.
Low Insurance Premiums:
While a low credit score won’t bar you from getting an insurance policy, it flags you as high risk, which drives your insurance premiums up. The better your credit score, the more negotiating room you’ll get to lower your premiums.
Unlock Access to the Best Credit Cards:
Your credit score is a key deciding factor for your credit card eligibility. If you have historically proven to pay your bills on time, credit card companies will consider you a low-risk customer.
You will have access to the most rewarding credit cards in the market, which carry incentives like travel points and cash back offers.
Save on Interest Rates:
Buyers with high credit scores usually have more leeway to negotiate lower interest rates. For big loans such as mortgages or car loans, even 1% interest reduction could mean thousands of dollars saved.
Better Housing Options and Security Deposit Waivers:
Your high credit score tells your landlord that you’re financially trustworthy. Since you have been able to maintain a healthy credit score, you’re responsible for your bills and are less likely to miss payments.
You’ll be approved for the rental and possibly even get security deposit waivers, which are primarily there to cover payment defaults.
3 Credit Score Tips for 2021
Whether you’re new to financial education or you had a bad patch, it’s not inconceivable to find yourself with a poor credit score. It could be because of many consecutive late payments or maxing out your credit limits.
Even something as simple as late cell phone payments will show on your credit report which will affect your credit score. The difference between credit report and credit score is that one depends on the other. The report carries a record of your loan paying history, credit activity, and status.
No credit is not good credit. In fact, because of a lack of credit information, living with no credit can be worse than living with bad credit.
Credit bureaus use the credit report to calculate the credit score. However, lenders will look at both the report and score to get a deeper understanding of your credit status.
Credit bureaus calculate your credit score based on these data metrics found in your credit report:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
Strive for a Healthy Mix of Credit:
Lenders like to see that you can manage different types of credit.
The three main types of credit are:
- Revolving credit has a capped limit with regular minimum payments for example, a credit card
- Installment credit has a fixed repayment schedule over a specified period. It includes major loans such as student loans, mortgages and car loans
- Open credit must be paid in full at the end of the specified period. Utilities and cell phone bills fall into this category
To achieve a healthy credit score, your records need to show more than one of the above credit types being paid on time with no balances.
That said, it’s not as simple as paying your bills on time.
Keep Your Credit Utilization Ratio Low:
Credit utilization ratio refers to the amount of credit used divided by the credit limit available to you. A high ratio means you’re maxing out your credit limit every time.
The ideal credit utilization ratio shouldn’t go beyond 30%, but it’s even better if it is less than 10%.
For example: If your credit card limit is $10,000, spend a maximum of $3,000 (30%). You’ll get an even higher credit score if you only spend $1,000 (10%).
Even during tough times, look for ways to keep good credit when unemployed. Spend as little as you can of the credit limit while continuing with the minimum payments. Look for local financial aid to help tide you over.
Maintain Your Zero-Balance Accounts:
Suppose you clear all your balances. Should you cancel all your credit cards?
No. Keep your balance free accounts open and find ways to charge a manageable amount to those accounts so that there is continuous activity on your accounts.
If you’re in a vicious cycle of your low credit score making it difficult for you to get a traditional card, here are a few things you can do to build a high credit score:
- Get a secured credit card which requires a deposit as the bank’s security against defaulting. Your deposit becomes your credit limit.
- Regularly check your credit report and dispute any errors that cast a negative light on your financial health.
- Get a credit builder loan. Its purpose is to show on time payments and at the end of the repayment period, you get your money back from the account.
- You can join the account of a trusted family user as an authorized user. Choose someone with a high credit score you can benefit from and start rebuilding your credit.
Fixing your credit score requires patience, time and constancy. With time, the above tips will help you work your way back to financial health.