3 TIPS FOR MAINTAINING GOOD CREDIT

If you have credit, you should learn to manage it effectively. This way, you will have a chance to pay off debt and accrue wealth over time. Get the best tips for credit management here!

Sallie Mae suggests…

1. Live within your means (to keep your debt level low)

Let’s start by answering the first question regarding smart credit management. What do you owe, and to whom do you owe it?

Simply put, to avoid running into credit problems, don’t spend more than you can afford. But it’s often easier said than done, especially at this stage of your life. That’s why you need to develop . . . and stick with . . . a budget.

But let’s face it. Mention that word to many people and they immediately think of some restrictive, penny-pinching plan that keeps you on a steady diet of macaroni-and-cheese and watered-down soup. But believe us, budget is not a dirty word.

Instead, think of it as a personal spending plan. It’s simply a way for you to understand where your money goes, make any necessary changes to fill in the “gaps,” and be prepared for both predictable and not-so-predictable expenses.

2. Borrow only what you can afford

The concept is simple: Don’t borrow more than you need. But how can you know how much is “too much”? Calculate your debt-to-income ratio.

Your debt-to-income ratio compares what you owe and what you earn (every month), and it’s a key number lenders use to determine your capacity to borrow additional funds. It’s usually a principal component in determining whether a loan application is approved.

How much is too much? Figure your debt-to-income ratio

Your debt-to-income ratio is one way to get a snapshot of your fiscal health. The formula is easy:

Divide
your monthly minimum debt payments
(including mortgage or rent)
by
your monthly gross income

Example: You earn $5,000 each month in gross income, and a yearly bonus nets you $500 a month. Your total monthly income is $5,500.

You pay $200 a month in student loans, $500 in rent, $150 on a car payment, and $150 on your credit cards and other expenses. Your total monthly debt payments are $1,000.

$1,000 (debt) divided by $5,500 (income) = a ratio of18.2%.

3. Maintain a Good Credit Score

Your credit score can affect many aspects of your life. Whether you need a loan to buy a home or if you apply for a credit card, your credit score is used to judge your reliability and risk.

Your credit score helps determine the terms of your loans and if you’ll even be approved.

The pros to having a good credit score

A good credit score means lower interest rates. It shows that you have a responsible credit history and are a low-risk borrower less likely to default on your loans. When you apply for a mortgage or auto loan, a lower interest rate saves you hundreds, if not thousands, of dollars in interest costs.

A good credit score also lets you be more selective when choosing your lender. The better your score, the more leverage you may have in getting good terms on your loans. Shop around: Having lenders compete against each other can mean you get a more competitive interest rate and ensures that you know that you explored a wide range of lenders before you committed to one.

The cons to having a poor credit score

Lenders use your credit score to judge how likely you are to repay a loan. A poor credit score may mean your loan application is rejected. But that’s just the start.

Your credit score is not only checked by lenders — it can be used when you make other financial arrangements, such as renting an apartment or signing up for utilities. In cities where rental companies can be selective about tenants, a bad credit history can make you an unappealing candidate. Bad credit can get you denied for basic services, such as electricity or a cell phone if your credit report shows you tend to pay late.

A poor credit score can even cost you a job! Prospective employers may check your credit rating to judge your degree of responsibility.

Many lenders charge different interest rates, depending on the applicant’s credit score, so even though you might get approved with a so-so credit score, you may pay a higher interest rate than someone with a better credit score.

What about needing a credit history?

Sometimes having no credit can be just as much of a problem as having bad credit.

If you have no credit history, lenders have no record to assess your borrowing behaviour. In this case, you need to establish some form of credit and use it responsibly to build up your credit rating.

Ways to improve your credit score

Your score continually changes, depending on how well — or poorly — you manage your credit.

These are some ways to build and maintain a high credit score:

• Pay your bills on time.
• Apply for credit only when necessary. Opening too many credit cards in a short time can be harmful to your credit score.
• The longer your credit history, the better. Cancelling an old credit card could hurt your credit score because it may shorten the length of your credit history.
• Keep credit card balances to less than 50% of the credit limit on the credit card.
• Make more than the minimum payment on credit cards.
• Have a mix of credit account types, such as revolving (varied monthly payments, such as credit cards) and instalment (regular monthly payments, like you make on a student loan).
• Check for errors on your credit report periodically, and ensure you have not become the victim of identity theft.

Ways to hurt your credit score

There are some sure-fire ways to get a low score:

• Exceed your credit limit on your credit cards.
• Open and close too many credit accounts in a short period.
• Make payments past due date or, even worse, default on a loan.
• Write bad checks.
• Declare bankruptcy.

Get the entire article at Sallie Mae!