Credit can feel like an ethereal concept, just operating as a mysterious number floating around in cyberspace. Since it only seems to come up when you take out a big loan or apply for housing, you may not even see the point of keeping track of it. However, a good credit score is important, especially in the long run. Even a 1% decrease in interest rates can make a substantial difference when applied to the life of a mortgage or car payment.
Take time to examine your credit and see what changes you can make to improve it. Your future self will thank you. Here are a couple of tips to get you started.
- Take advantage of the three free credit checks per year
There are three nationwide credit reporting companies that must provide at least one free report every twelve months. These companies, Experian, TransUnion, and Equifax, are trustworthy sources that will send you a quality report dissecting your current credit score. Make sure to save or print each one in order to keep it for future records.
Carefully look over the reports to check for any inconsistencies. If the reports show that you keep missing payments or are continually making late payments, look over your own records to corroborate the information first. If you find that the information doesn’t match up, make sure to send a dispute to the official source listed on the report. If it does match up, see what changes can be made to avoid repeating those issues.
While paying for extra credit checks throughout the year may not really be worth it, make sure to take advantage of the free opportunities. These reports will give you a clear picture of where your credit score is, what may be holding it back from being even better, and what you can change to improve your score.
- Increase your credit limit (if possible)
When credit reporting companies get data on your credit habits, they often look at the percent of your limit that you have spent. Unfortunately, that doesn’t always provide the most accurate representation of your spending. Depending on when they get their data, they could be pulling their information from right before you pay off your card, making it look like you are consistently keeping a higher balance than you actually are. One way to combat this issue is by increasing credit limits.
As the credit card company becomes more comfortable with your spending habits and sees that you keep paying things off, they may allow you to increase your credit limit. Increasing that limit brings down the percentage of available credit you use on a monthly basis and simply looks better to credit reporting companies. For example, if you spend $1000 per month on a credit card with a $2000 credit limit, you have utilized up half of your spendable credit. However, if you spend that same $1000 on a card with a $6000 limit, that reduces it down to 1/6 of your spendable credit used. This lowers credit utilization and will improve your score.
This second tip’s effectiveness also comes down to your personality. If you have a hard time keeping track of your credit and can consistently overspend each month, then the benefits of opening bigger credit options may not really outweigh the temptation to spend more. However, if you use credit responsibly and don’t overspend on a consistent basis, increasing your available credit can open a world of benefits.
- Pay off your debts twice in each month
If increasing your credit limit isn’t possible on your card or you simply don’t feel comfortable with the potential consequences of opening that door, there is another option. Break up your payments throughout the month. Instead of paying off a full card at the end of the month, you can pay your balance off twice per month.
While it may not seem like a huge difference, it can change the way credit reporting companies look at your spending habits. Instead of showing you putting a lot on your card before paying it off, it will show a lower running balance and a lower level of credit utilization. That consistency and dedication also looks good upon closer inspection, and it has the side benefit of making people check their balance more than once a month.
Credit can be a tricky thing to navigate, especially since it draws information from so many corners of the financial world. The benefits of good credit are worth the work though. This is especially true in the long run, where just a couple percentage points off interest payments can add up to surprising amounts of money saved over a lifetime. Take some time to work on it, and you may see benefits sooner than you might imagine.
Jonathan Jenkins is a content contributor for Inspiration.org.
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