Who would have thought one number could play such an outsized role in your life. But, with your credit score, it's true.
Good credit can mean the difference between saving thousands on mortgage and car payments, securing a more favorable interest rate on your credit cards, and yes, even your life insurance policy.
The good news is there are things you can do to help build and maintain good credit. Even if you're struggling with poor credit right now, you can turn things around.
What is credit, and why does it matter?
If you spend any time looking at credit cards or loans, you'll hear a lot about your credit score. So what is it exactly?
Your credit score is a number that indicates your creditworthiness. It tells banks, lenders, and even life insurance companies if you're a potential credit risk or someone who generally pays bills on time.
Your score, also referred to as your FICO score, is a number that ranges from 300-850. It's based on your credit history. Your credit history accounts for things like how often you pay your bills on time, how much debt you have, and the age of your credit cards and loans.
The higher your score, the better. A score in the 670 range and above will tend to get much better rates on mortgages and other loans. If your score is below that, you're considered riskier, which could hurt you regarding loans and other financial areas where your credit gets checked.
Now that you know what credit is, here are some ways you can start building and improving it.
Make on-time payments
If you take away one piece of information from this article, make it this one. A big portion of your credit score is based on your payment history. Some estimates are it could account for approximately 35% of your total credit score.
If you've struggled to pay your bills on time, that's likely one of the biggest reasons why you might have a lower credit score. On the other side, if you focus on making sure your payments are always on time, it's a relatively easy way of improving your score.
Here's what you can do: go through all your bills and mark the due dates in your calendar. That way, you know exactly what bills are coming up when. Enrolling in autopay for any monthly payments that offer that capability can be a helpful way to ensure your bills are paid on time. If you keep a monthly budget (which is recommended), make sure you adjust it accordingly so you can comfortably handle what you owe each month.
Understand your credit limits
Another big part of your score is called your credit utilization. Basically, this is the ratio between how much total credit you have and how much you’re currently using.
A good rule of thumb is to try to keep your credit utilization under 30%. For example, if you have a credit card with a $1,000 limit, try to keep your balance under $300. When your balance goes above that limit, it could negatively impact your score.
Something else you can do to help improve your utilization ratio is to ask for a higher credit limit. If you've been a good customer who pays their bills on time, you can call and ask for an increase. Make it a habit to call your credit card company once a year and ask for more credit.
Monitor your credit
When it comes to your credit, there's another potential danger lurking out there—fraudsters. Every year, thousands of people get their identities or credit cards stolen.
Fraudsters use your information to open new cards or loans and can rack up thousands of dollars, on your credit, without you even knowing. That's why it's so important to check your credit report regularly.
The good news is you can do it for free. Use the website AnnualCreditReport.com, and you can get a free report from each of the three main credit bureaus. A good tip is to stagger your report requests. Check your report every few months and catch any potential issues. There are also no-cost services that will notify you anytime something happens that impacts your credit score.
Dispute errors on your credit report
Beyond catching potential fraud, there's a reason why it's so important to check your credit report regularly. It's possible there are some mistakes on your report that are harming your credit score.
For example, you might have switched phone carriers and paid off your bill in full when you switched. But, for some reason, it didn't get recorded as paid. It could be sitting there marked as delinquent on your credit report.
When you check your report regularly, you can pick up these errors and fix them. A quick phone call to your phone company to remove this mistake could end up improving your score by several points.
Avoid closing accounts
You might think it's a good idea to close a credit card you never use anymore. But the reality is, the length of time you've had an account open matters to your score. Usually, the longer, the better.
If you've been able to keep a card open for a few years and have regularly paid your balance, consider keeping it open. That extra time is only going to help your credit score.
Even better, consider using it for something small, like your Netflix account or weekly latte. That way, the card is still active, and you know you'll have no problem paying it off each month.
Pay your balance off, if you can
Credit cards make their money through the interest rates they charge you for keeping a balance on the card. So, paying off your balance each month serves two purposes: it saves you money over the long run, and it helps your credit score.
Remember when we talked about your credit utilization? Keeping your balance as low as possible is going to help increase that ratio, which also makes for a better score.
If you don't have the funds to pay off your balance in full each month, aim to pay more than the minimum. Any little extra you can pay toward it, even if it's just $10 or $20, makes a difference.
Once you have a better understanding of how credit works, you can be a lot more strategic with your choices, so you don't inadvertently do things that blow up your score.
For instance, look for cards that have low-interest rates or annual fees to start. Also, make sure you're selective with how often you look at new cards and loans. If you open a bunch of cards at once, those 'hard pulls,' as they are called can negatively impact your credit score.
The bottom line is being diligent can go a long way. If you've been struggling with poor credit, taking these steps seriously can help you improve your credit and put you in a better financial position over the long-term.
How does credit affect life insurance?
You might be surprised to find out that your credit score might influence your life insurance too. Insurers look to the information on your credit report to help determine the level of risk you carry. That helps them determine your insurance score, which is part of figuring out how much you'll pay for your monthly premiums.
In general, you'll have a better insurance score (leading to a more favorable rate) if you pay your credit card bills and loans on time, don't have large balances on your cards, and have a solid credit history.
It's never too early, or late, to start improving your credit
Improving your credit score may feel daunting, but if you think strategically and focus on addressing single steps, like paying your bills, minimizing your utilization score, and monitoring your credit, you can get there.
It's also important to remember that your credit score rolls over into many other areas of your life, from your mortgage to your life insurance. Working to improve it can have many positive impacts across the board.
Much like improving your credit, getting life insurance is a step that can help you secure your financial future. Have any questions about the life insurance process? We're here to help. You can get started with Ethos today and have a personalized quote in minutes.
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