There’s no escaping the fact that building and maintaining good credit is a fundamental part of your financial success. Not only is having good credit a requirement for getting loans and credit cards, especially at competitive interest rates, but it affects other parts of your financial life—even if you never take out a loan.
Lenders rely on credit scores as key metrics to understand how likely you are to repay debt. But many employers, merchants, and service providers also review credit files in order to understand if you’re financially responsible.
For instance, having subpar credit means you’ll pay more for certain types of insurance (in most states) and also puts you at risk for getting turned down for a job or being denied to rent an apartment or home.
Because the consequences of credit run so deep in our financial lives, it’s important to understand the system and manage your credit wisely. In this post I’ll cover four questions from Money Girl Podcast listeners about how to monitor, repair, and build credit for life.
Free Resource: The Credit Score Survival Kit – download this ebook and video tutorial with proven strategies to build credit fast!
Best Ways to Monitor, Repair, and Build Credit
Since few of us are taught the ins and outs of how the credit system works, there are many misconceptions about how credit reports and credit scores work. Instead of waiting until you need credit to understand it, brush up on the basics now with these resources:
Best Tips to Improve Your Credit Score
7 Credit Score Traps You Should Avoid
How Many Credit Cards Should You Have for Good Credit?
You can also send your credit questions to me at money@quickanddirtytips.com. Let’s answer some that I recently received from Money Girl readers and podcast listeners:
Credit Question #1: Britt says, “After not paying my student loans for about 10 months, my credit took a rather large dip. But I’m paying on time now and using credit cards to make charges that I pay off in full. As a result, my scores have increased into the mid-600s but they seem to be at a stand-still. What can I do to increase them before I apply for a mortgage?”
Answer:
I’m really glad that Britt’s finances are back on track. Making payments on any type of loan or line of credit that are 30 days past due will raise a bright red flag to creditors that you may be a credit risk.
Your payment history is the most important factor in how your scores are calculated because it clearly indicates how you manage credit. That’s why Britt's scores took a dive after becoming delinquent. Getting past due accounts caught up, or working out a new payment arrangement with the lender, is the best thing you can do for your credit.
The good news is that as negative information in your credit file ages, the less significant it is in the calculation of your credit scores, especially if you have many new positive transactions.
However, even after you get caught up, late payments don’t disappear from your credit history. They stay on your report for seven years and then the entire account falls off of your record. So once you have negative information on your credit report it sticks with you for a long time and will suppress your credit scores.
The good news is that as negative information in your credit file ages, the less significant it is in the calculation of your credit scores, especially if you have many new positive transactions. So make sure a due date never falls through the cracks and you continue to make every loan and credit card payment on time.
In addition to being consistent with payments and patient to allow time to work on your side, there are a few more tips and strategies I recommend. One is to carefully check your credit reports for errors and get any inaccuracies corrected as quickly as possible.
Another strategy is to carefully watch your credit utilization ratio, which is the amount you owe on revolving accounts—such as credit cards, home equity lines of credit, and personal lines of credit--compared to your credit limits.
Keeping your account balances below 20% of your credit limits (both on individual accounts and on the total of your accounts) is essential for building credit quickly. To learn more about managing your credit utilization, read or listen to these resources:
Credit Utilization—What It Means for Your Credit Score
8 Credit Card FAQs and Tips to Build Credit
5 Ways to Get a Loan With Bad Credit
To cut your utilization ratio you can either decrease your outstanding balances on revolving accounts, request higher credit limits, or do both. Having higher credit limits is very helpful when you want to boost your credit scores.
So don’t cancel any credit accounts—even if you don’t use them! It’s better to keep your credit limits in place rather than closing accounts, especially when you might finance a big purchase in the near future.
To make sure a card issuer doesn’t cancel a card that you haven’t used in a while for inactivity, make occasional charges and pay them off in full to build a rich history of positive credit transactions.
To learn more about when you should or shouldn’t get rid of a credit card or other line of credit, don’t miss this recent post: Canceling Credit Cards—5 Questions to Ask Before Closing Accounts.
It's better to keep your credit limits in place rather than closing accounts, especially when you might finance a big purchase in the near future.
Managing your credit wisely in the months and years that lead up to buying a home or refinancing a mortgage is critical. Since a mortgage is one of the largest loans many of us ever get, there’s a lot of interest expense on the line. Be sure to read How to Prepare Your Credit for a Mortgage Approval for tips to get the best home loan possible.
Related Content: What to Know Before You Cancel a Credit Card
Credit Question #2: Krystal says, “I’m a little concerned because I was contacted by a collections company today about an overdue doctor bill for $40 that I never received. I settled the debt today and asked if the account was reported to the credit bureaus. They said no, but what can I do to make sure this incident won’t negatively affect my credit?”
Answer:
When in doubt about what’s happening with your credit, check your credit report. That’s the best way to know if it contains an error, negative information, or if you’ve become the victim of fraud.
You can get your credit report for free from each of the 3 nationwide credit bureaus (Experian, Equifax, and TransUnion) or from the official credit report site, annualcreditreport.com, every 12 months. You can view each report online, download it, or request that a copy be mailed to you.
There are also popular credit sites like Credit Karma and Credit Sesame that give you access to one or more of your reports once a month or as often as you like. They allow you to see your credit report, give you one or more of your credit scores, and provide customized recommendations about how to boost your scores with no strings attached--except for seeing ads.
If you see something that shouldn’t be there—like the bill that Krystal never received—dispute it right away on the credit bureau site or at annualcreditreport.com.Pulling your credit report is a “soft inquiry” on your file, which never hurts your credit score—so monitor your credit as often as you like. I recommend reviewing each of your credit reports at least once a year and perhaps more often if you intend to finance a big purchase, like a home or car, in the next 3 to 6 months.
See also: 9 Things That Can't Hurt Your Credit Scores
Question #3: Asher says, “I’m a U.S. expat who’s been living abroad for the last 20 years. My FICO score went down slightly when I used a lot of the credit limit on my U.S. credit card—but then went back up to near 800 when I paid off the balance. Since I don’t have a U.S. job or loans, what can I do to improve my score?”
Answer:
One of the most important factors in your credit scores is the ratio that I previously mentioned, called credit utilization. It applies to revolving accounts only, such as credit cards and lines of credit, that stay open month after month with no ending date.
Asher experienced first-hand how quickly this ratio can cause your credit scores to move up and down. Keeping a low utilization, such as below 20% is ideal for good credit, since it indicates that you’re using credit responsibly and not maxing out your credit lines.The ratio equals your total account balance divided by your total credit limit. For instance, if you have a credit card with a balance of $2,000 and a credit limit of $4,000, your credit utilization ratio is 50% ($2,000 / $4,000 = 0.50).
There are many different credit scoring models and each has a different numerical or alphabetic range. If Asher is looking at the poplar FICO score, which tops out at 850, being near 800 means that he’s already got an excellent score.
Working outside of the U.S. doesn’t affect your credit scores. The only way to build credit and maintain it once you’re an expat is to have active credit accounts, such as a credit card, and use them responsibly over time.
I recommend looking for a no-foreign transaction fee credit card so you can make charges overseas at the lowest cost possible.
Also see: FICO vs. VantageScore Credit Score—What’s the Big Difference?
Question #4: Courtney says, “I need help repairing my credit so I can sell my house and finance a larger home. Can you offer advice on a reputable source?”
Answer:
In most cases repairing your credit is something you can do yourself by pulling your free credit reports, correcting inaccuracies, paying bills on time, maintaining a low utilization ratio, and having a mix of loans and revolving accounts.
But if you don’t have the time to review your credit report, have already disputed errors that haven’t been resolved, or have many negative items, check out Lexington Law. Lexington is a large network of credit repair attorneys and professionals that’s been around since the early 1990s.
The real value of credit repair services is in informing you about your credit and debt collection rights and leveraging the law to negotiate with creditors on your behalf.
There’s no guarantee that a repair firm will be able to convince a creditor to remove any negative item that is accurate from your credit report. However, it’s possible to negotiate the removal of a bad mark as part of a settlement offer.
Before working with a credit repair firm, be clear about the services they provide and the value you’re going to get for your money.
To learn much more about credit, download the Credit Score Survival Kit. It’s a free multimedia resource I created as a gift for you with a video tutorial and 3 smart strategies to build excellent credit scores (that you can real or listen to). Plus, I tell you how to save money by getting your credit score absolutely free as often as you want.
Get More Money Girl!
Want to know the best financial and productivity tools that I use and recommend to save time and money? Click here to check out 40+ tools I recommend!
To connect on social media, you’ll find Money Girl on Facebook, Twitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on iTunes or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web.
Click here to subscribe to the weekly Money Girl audio podcast—it’s FREE!
There’s a huge archive of past articles and podcasts if you type in what you want to learn about in the search bar at the top of the page. Here are all the many places you can connect with me, learn more about personal finance, and ask your money question:
Dominate Your Dollars - Laura's private Facebook Group
Money Girl on Facebook
Laura on Facebook
Twitter
Google+
Pinterest
Money Girl podcast on iTunes (it’s free to subscribe!)
Money Girl on the Stitcher app (also free to subscribe!)
Email: LauraDAdams.com/contact
Click here to sign up for the free Money Girl Newsletter!
Download FREE chapters of Money Girl’s Smart Moves to Grow Rich
To learn about how to get out of debt, save money, and build wealth, get a copy of my award-winning book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite bookstore as a paperback or e-book. Click here to download 2 FREE book chapters now!
Credit card, fountain pen and diagram image courtesy of Shutterstock