March is Credit Education Month, and while the topic may not seem exciting, your credit plays a huge role in your life, especially when it comes to buying a new car. That’s why it’s important to know how to keep it in the best shape possible.
What Is Credit?
Credit is the right to borrow money and pay it back later or to defer payment of a debt, typically with some charge. As Experian.com points out, there are four types of credit: revolving, charge cards, service, and installment credit. Credit cards are typically revolving credit, with a maximum credit line and a monthly payment. Charge cards are slightly different in that they must be paid in full every month. Service credit refers to things like utility bills and cell phone bills. Installment credit is a financing of a specific amount of money paid back in installments over an established period of time, such as auto financing or a home mortgage loan.
What Is A Good Credit Score?
As with most things, it’s hard to hit the mark when you don’t know where the target is located. When it comes to your credit score, your target range will depend on what scoring model you’re using, according to MSN.com. For example, generic FICO scores range from 300-850, while VantageScore, a system created by the big three credit bureaus (Experian, Equifax and TransUnion), ranges from 501—990, notes CNN Money. A good place to start is with FICO, because it’s the one most commonly used by lenders, according to Bankrate.com. But, the bottom line is that no matter what scoring system you’re using, the higher your score, the better.
How To Build Good Credit
In order to establish good credit, you need to build a credit history, which can be a little tricky at the outset. As MSN Money points out, it’s sort of a chicken and an egg scenario, in that it’s sometimes difficult to get credit if you don’t already have it. They recommend a secured credit card, where you place a security deposit in return for a credit line that’s often the same amount.
Then — and this one’s very important — make sure you pay your credit card bill on time, every month. Late payments can create a large chink in your credit armor. According to DailyFinance.com, several factors can determine how much damage a late payment does to your credit, including the number and frequency of delinquent payments, the length of your credit history, and the number of accounts you have with no previous late payments. The interesting thing is that the better your credit, the harder the impact when you’re late with a payment.
Additionally, you should plan to charge no more than 10—20 percent of the amount of credit available on your card, so that you don’t accrue a hefty debt-to-available-credit ratio that can damage your credit, according to MSN Money.
There are also ways to build your credit without using a credit card. From entering into arrangements to have your rental payment history provided to one of the big three credit bureaus (Experian,) to taking out a small loan designed to build your credit, USNews.com says there are viable options for consumers to establish credit on their own.
Why Credit Monitoring Is Crucial
You work so hard to make sure your credit is the best it can be. You diligently pay each bill ahead of the due date each month. You keep your debt-to-credit ratio low. You’ve built a strong credit history for yourself, so why wouldn’t you want to make sure it accurately reflects your dedication and persistence? Identity theft is a very real threat to consumers today, and keeping your eyes on your credit report can help minimize any damage caused by such an intrusion. What’s more, errors on your credit report can cause you to pay more in interest and prevent you from getting credit when you need it, as the Consumer Financial Protection Bureau points out. They say it’s best to check your credit report annually at the very least, and if you see errors, have them corrected. According to the FTC, by law you’re entitled to a free credit report once a year from the three credit bureaus, which can be obtained by visiting AnnualCreditReport.com.
If you establish yourself as a trustworthy borrower, you’re more likely to have credit in good standing. If you’ve had some bumps in the road (late payments, maxed-out cards, too many cards, etc.), your credit suffers and lenders may be less likely to extend a line of credit to you. As Experian.com points out, with big life purchases like a new car or home on the line, and the fact that employers sometimes determine the viability of job candidates based on their credit history, maintaining good credit can be a life-altering decision.
Do you have credit tips to share? Let us know in the comments below!