How to improve your credit score the smart way
Categories: Credit education and credit awareness, Credit Health, financial literacy
Tags: Credit Health, Credit Wellness, Debt stress, Financial distress, Financial Health, Financial Literacy, Financial support, Financial Tips, Money solutions
Your credit score is a powerful financial health indicator, but chasing a good score without keeping your bigger financial and debt plan in mind, can lead you to make poor money decisions.
The world of credit can be tricky. There are people who tell you that loans are evil and the worst thing you can do is to get into debt. Others say that without taking on debt you cannot build a credit record and that without a credit record you cannot get access to good debt – the kind that makes it possible to buy a home of your own or pay for tertiary education.
There is truth in both these points of view, and it is up to you to decide how you will deal with debt.
Most of us need debt (a loan) for life’s big purchases, such as a car or a house or a good education. Sometimes we also need a loan to deal with emergencies, such as medical treatment or unplanned home repairs.
To get these loans, especially at a good interest rate, you need a credit record that proves you are willing and able to repay the loan. Usually, credit providers look at your credit score to tell them whether or not you are likely to be a good customer.
It is, therefore, important to build a strong credit score of 680 and higher. However, a credit score is not the only important factor and you should be careful to not focus so much on building your score that you neglect other healthy financial habits.
Let’s have a look at some of them:
- You often hear that you should have a mix of credit types for a healthy credit score. This means that you shouldn’t only have personal loans or store cards, for example. However, a good financial habit is to manage the loans or accounts you do have well, instead of opening more and different accounts just to build a credit score.
- In order to keep your debt usage ratio low, you may be told to keep old accounts open so that you have more credit available than what you are using. (Your debt usage ratio shows how much of the credit you have available, you are currently using. The lower the ratio, the better.) While this may sound like good advice, there is always the risk that you might use that credit simply because it is available. Also, by keeping old accounts open to make your numbers look better, you are in effect hiding your bad credit habits from yourself. That is certainly not the way to clear debt and build financial wellness.
- A good financial habit that is not reflected in your credit score, is your debt-to-income (DTI) ratio. This shows you how much of your income you are spending on repaying debt. Your DTI ratio is not part of your credit score calculation, but credit providers definitely look at it when they consider your loan application.
- Probably the most powerful money habit that is not evident in your credit score, is financial planning and goal setting. When you know what you want to achieve, you can plan to get there. For instance, if owning your own home is one of your goals, find out what your credit record and credit score need to look like to give you a good chance of getting a loan when the time is right, and what other indicators financial institutions will consider. Then focus on the money habits that will result in those outcomes. If, on the other hand, you don’t want to own property, your approach to building a credit record might be very different. The point is that you need to know what your goals are so that you can put the money habits in place to achieve them.
Financial health depends on a variety of factors, of which your credit score is only one. Knowing how to improve your credit score is extremely valuable, but it is not the only thing you need to know to achieve financial health.
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