Seeing your credit score drop even five points can really spook you since it’s not always clear why your score decreased. There are several factors that can influence your credit score. But first, it’s important to understand how your credit score is determined.
Credit reporting agencies look at aspects of your financial health profile – such as payment history, credit utilization ratio, age of credit – to determine your credit score. To ensure that a low credit score doesn’t continue to haunt you, here are some strategies to maintain a good credit score and avoid any dips.
Don’t Ghost Your Bills
When it comes to paying your everyday bills, it can be a rather annoying task to take that money out of your paycheck to pay off said bills. However, this is the most crucial component of what determines your credit score. For instance, having a poor payment history by making multiple late credit card payments, especially on loans and your mortgage, can greatly reduce your credit score and hurt you in the long run.
Credit reporting agencies want to know they can trust you and that you are reliable in paying back what you owe. So make sure to pay your bills promptly! One way to ensure you are maintaining a solid payment history with on-time payments is by first being aware of your payment due dates and noting those recurring dates (ex: your credit card bill payment being due every 25th of the month). If any of these dates are too close together, such as the same day or even a few days apart, consider changing the due date by calling your credit card’s customer service department so you can spread out those payments. Another easy tip is to set up automatic payments so you won’t forget to pay any bills or pay late!
Avoid Sucking Your Credit Dry
Building credit is important but you might be using your card too much, even if you’re not maxing out on your card limit. Credit utilization ratio is another high impact factor that affects your credit score so try to keep this as low as possible by using less than 30% of your credit limit and always paying off your credit cards in full each month! This rule applies across all your credit cards, so be sure to balance your usage between credits so one card doesn’t have a comparatively higher ratio. You can also increase your credit limit to achieve a better credit utilization ratio, which does mean you can spend more but this is only recommended if you’re sure you can pay it back and not take on more debt.
Create a Debt Repayment Plan So You’re Not Brewing Up More Debt
Having a high amount of debt can mean a lower credit score since you most likely can’t spend more and take on new debt. It could be a sign to credit reporting agencies that you aren’t actively paying that debt off. This isn’t always the case, especially if you are diligent about making payments on time and not using too much of your credit. However, managing your debt with a debt repayment plan that makes sense for your situation is a great step towards helping your credit score.
For example, when it comes to student loan debt, most student loan repayment plans are on a 10-year schedule that evenly distributes debt across 120 months. As a new grad, this may or may not be manageable for you. If not, the government offers some alternatives to ease this financial burden. The most important thing is to not ignore your debt and let it pile up and instead be proactive in finding a strategy that works for you. Consider debt consolidation if you have several debts to pay back with high-interest rates. This can often simplify your debt by allowing you to pay the debt back under one interest rate rather than multiple and can make a lot of sense if you can score a lower interest rate. Beware of switching fees though!
In the spirit of the spooky season, make sure to dust off the cobwebs on your financial goals and utilize these strategies to make sure you aren’t hurting your credit score. We know there’s nothing scarier than not having your finances in a good place!