By Maura Attardi
Money Management International
Good credit is a marathon. Bad credit is a sprint. If you think about it, it makes sense. Credit – and more specifically, your credit score – is a measure of trust. Lenders don’t have the time to get to know you personally. They can’t talk to your mom or your 12th grade physics teacher. They don’t know you, so they need a quick way to determine whether or not they should lend you money.
If you’ve ever done it yourself, you know that lending money requires trust in the borrower. And you probably also know that trust takes a long time to earn, but it can be broken almost instantaneously. So that’s what your credit score is trying to communicate to creditors – how much they can trust you with their money. You build that trust – and your score – slowly, by using credit responsibly.
Developing good credit is an ongoing process that starts with understanding how credit reporting works. While paying your bills is an essential step in the right direction, there are other smaller, lesser-known steps that are key to establishing and keeping a clean credit report and a good credit score. Applying these steps will go a long way in giving you the credit history you deserve.
Check your credit report for accuracy
First, check your credit report regularly to ensure that the data included is accurate. While you want to look out for obvious errors, such as accounts that may have been opened as the result of identity theft, there are other smaller errors that may exist that can harm your credit. In addition, look at your name on the report to ensure that it’s accurate. Something as obvious as changing your last name from your maiden name to your married name could make a large difference in your ability to obtain credit, as your married name and maiden name may not be linked within your credit history.
Establish credit history
Next, make sure that you actually have a credit history. Without any sort of credit history to go on, lenders have a difficult time evaluating whether or not you are a risk. Keep in mind that each individual has their own credit file and report, so spouses will each need credit cards and/or loans in their own name. If you don’t like the idea of having credit cards or loans, consider a secured credit card or a credit card with a low limit that you pay off every month, establishing that you are a reliable and trustworthy consumer.
Stay loyal to creditors
Being loyal to your creditors is the next step. Creditors like to see a strong history so keeping cards open for a long period of time is beneficial to your credit score. While the first credit card you opened may not have terms as appealing as some newer cards, consider contacting your existing lender for better options rather than canceling.
Find a balance
Next, make sure that you don’t have too much open credit. Lenders often look at your credit lines as potential liabilities, and this can hurt you. On the other hand, using a high percentage of your available credit can also be detrimental to your credit score. It’s essential that you develop a good balance.
Pay bills on time
Finally, pay your bills on time. When payments are delinquent, creditors report this information to the credit agencies, and it can harm your credit score. Timely payments of the minimum required payment or more shows creditors that you have a history of paying your bills on time.
Keep in mind though, unfortunately, no matter how well you’ve built trust, it can be destroyed quickly. Here are the fastest ways to bring that trust – and your score – crumbling down around you.
Missed payments
Timing is everything with credit scores. Have you ever worked somewhere with one of those big signs that says how many days it’s been since the last accident? The message is rarely about how many accidents they’ve had, but more about how far in the past those accidents occurred. Your credit score views missed payments similarly. A 30 day late two months ago has more impact on your score than a pair of 90 day lates five years ago. Recent negative reporting has a greater impact, because it more accurately reflects your current ability to repay borrowed money. Again – creditors don’t have the ability to really know you or to accurately account for events that are generally out of character. There may have been a very good reason why you were late, something that is very unlikely to happen again, but creditors don’t usually have the resources to account for that kind of nuance. If you miss a payment your score will go down in a hurry. The only way to remedy that is by making on-time payments going forward, and letting the number on your Days Since a Missed Payment sign get higher and higher.
Closing old accounts
Each new relationship you create with a creditor or lender is built on the back of your previous relationships with creditors. Those creditors are basically your references, even if they don’t exactly write letters of recommendation for you. When you close old accounts those references disappear. The quantifiable “trust” that is associated with that long relationship is then essentially removed from your score. Any negative reporting associated with that account, however, remains until at least seven years after the negative event occurred. So you lose all of the good, but keep the bad. If you’re considering closing old accounts with unfavorable terms just keep in mind that unless the rest of your credit history is solid and well-established, your score might take a heavy hit.
Overextending yourself
Even if you’ve never missed a payment, opening a lot of new accounts and maxing out the accounts you already have could have a distinctly negative impact on your credit score. Why? Again, think of yourself as a lender. If your cousin asked you for $100 and you trusted them (and had $100 to spare), you’d probably be okay making that loan. But if your cousin asked you for $100 and you already knew that they owed your brother $500, your father $700, your uncle $1,000, and your grandmother $5,000, you might be less inclined to make that loan. Your current debt responsibilities play a factor in your ability to get new credit. Lenders want to eventually get their money back, remember. So it shouldn’t be a surprise that taking on more and more debt will eventually cause your score to go down. To maintain a healthy score avoid maxing out accounts and limit the number of open accounts available to you. If you’re already maxed out, get to work paying down debt.
Assuming that everything’s okay
Because your credit score doesn’t seem to have an impact on your everyday life, it’s easy to assume that everything’s fine. It’s even easier to assume that when you’ve never missed a payment, maxed out an account or done anything else to threaten your score. But even if you’re doing everything right, your good credit can still be undone overnight. Credit reporting errors are incredibly common and so is identity theft. The worst part is that most consumers won’t become aware of these issues until they’re applying for credit or a loan and find out that their “perfect credit” isn’t so perfect anymore. Everyone is entitled to a free copy of their credit report every year. Visit AnnualCreditReport.com and make sure you’re checking your report regularly. The sooner you spot errors and illicit activity, the sooner you can start fixing those issues.
Developing good credit is an ongoing process that starts with understanding how credit reporting works. And remember, that credit cards are not new money, free money or more money. They are just a loan you have to pay back! For additional tips on creating your budget and managing credit, visit www.MoneyManagement.org/NFL.
About Money Management International
Money Management International (MMI), the nation’s largest full-service credit counseling agency, offers financial education and advice over a variety of financial topics such as managing money and expenses, understanding credit report and scores, paying down debt, and many more. To schedule an appointment for one-on-one financial counseling with a certified credit counselor, visit www.moneymanagement.org or call 866-531-0511.