Credit Score Fundamentals

How to build and maintain a good score

A credit score may only be three digits, but that number is a big deal—it can sometimes determine the course of your life. From a lender’s perspective, your credit score indicates how likely you are to repay debts in a timely manner. We spoke to Farnoosh Torabi, host of the popular financial podcast So Money, for valuable tips on getting ahead of the game and establishing and preserving good credit.

WHAT THE SCORE MEANS TO YOU

Your credit score is a major personal financial indicator that ranges anywhere between 300 points (the lowest) and 850 points (the highest). Torabi suggests aiming for a score in the mid-700s and up. Higher credit scores will earn you the best interest rates on loans. Additionally, you should pay close attention to the major factors that can harm your credit score:

  • Paying bills late
  • Racking up too much debt
  • Applying for several credit cards within a short period of time

It’s important to monitor your credit score regularly. It’s an urban legend that requesting to see your score can harm it. “A so-called ‘hard inquiry’ from a bank or credit issuer can potentially ding your score, but only if there are multiple hard inquiries on your credit. Checking your score yourself is totally fine and I highly encourage it at least once a year,” Torabi adds. “And for what it’s worth, a new survey from Chase Slate1 finds that Millennials are the best at reviewing their scores regularly, more so than Gen Xers and Baby Boomers.”

"Checking your score yourself is totally fine and I highly encourage it at least once a year"

ESTABLISHING CREDIT

Every financial journey begins somewhere. Consider applying for a credit card to start building credit. “Just know that if you’re a credit newbie, you probably won’t qualify for a card with a very high credit limit. Banks and credit issuers want to be sure you can handle it, so they’ll probably start you off with a smaller limit,” says Torabi. She suggests applying for a card at your local credit union, where it may be easier for someone with little to no credit history to get approved. “No matter what card you open, it’s critical that you maintain a low debt balance and pay your balance off in full each month,” Torabi advises. Missing a payment heavily impacts your score—it can set you back 50-100 points, depending on how delinquent you are. Don’t let this scare you too much though. Time does heal all wounds (or at least some). Torabi explains, “If you’re 30 days past due, that’s not as severe as being several months past due and in collections, but it’s still going to take some time and regularly paying off your bills in full and on time to repair your credit.”

There are several other ways to build credit, too. Aside from credit cards, you can also establish credit with student loans, a car loan, and even a mortgage.

MAINTAINING GOOD CREDIT

Staying on top of your credit score is equally important as building one. Torabi recommends a couple steps for sustaining a good credit history without stress.

  • Pay your bills on time. Automate to avoid the stress of meeting payment deadlines. You can link your checking account to your credit card account, automatically paying off the balance each month. Torabi says, “This requires that you don’t overspend on the credit card and maintain enough cash in your checking account to cover the monthly expenses.”
  • Keep your debt balance to no more than 30% of your available credit limit. This is extremely important to keep in mind, as this ratio is the second greatest factor in determining your credit score. If the sum of all your credit card limits is $10,000, aim to keep your total balance to $3,000 or less at all times. Maxing out your cards signals that you might be overspending and having financial troubles and your credit score can suffer, as a result.

Most credit cards and banks have mobile apps, which make it extremely convenient to check your balance regularly and on the go. Some may even offer to let you review your credit score once a month. Take advantage of all the tools and resources available to you. Proactively monitoring your finances and your credit is a smart way to manage your money and will ultimately be helpful when making a larger purchase, like a home. It’s important to remember that missteps, like late or missed payments, can stay on your credit report for up to seven years. Your credit history follows you around, and in the financial world, your credit score is one of the most important numbers attached to your name.

KEYS TO THE INS AND OUTS OF CREDIT

Aim for a credit score in the mid-700s and higher

Be clear on what impacts your score so that you avoid missteps

Pay your debt off in full and on time

Keep an eye on your credit card balance

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