5 Credit Hacks You Need To Know
You credit score is often thought of as your financial reputation. The credit score is a lender’s only reliable resource used to determine if a potential borrower is trustworthy enough to repay the loan. Lenders evaluate a person’s credit score and make a judgment based on algorithms, designed to protect financial interests. Strong scores are likely to result in approved loans and lower interest rates while weak ones are not. There isn’t really anything personal in the assessment—it’s all in the numbers.
It is important to maintain a healthy credit score so that you can show banks and credit unions you are responsible in the managing of your finances. It also helps when applying for larger loans, like a home mortgage. A lender can find it difficult to justify giving a borrower a large loan if they can’t be certain will be repaid or if they have the means and track record to prove it will be repaid.
Credit scores are unfortunately prone to heading downhill…and quickly. Small purchases add up, interest rates take their toll, and balances can exist for years. A few missed payments here, an unnecessary purchase there—soon enough, your credit score is in pieces. Repairing a damaged credit score is a long and often complicated process. But it is possible, and with a little bit of guidance and a lot of discipline, you can maintain a healthy credit score.
Below are some Credit Score Hacks to help you get (and stay) on the right track:
Hack #1: Credit Card Balances
Many credit card holders sometimes see their maximum limits as balance minimums. However, it is best to keep your credit card balance no higher than 30% of the card’s limit. Balances exceeding 30% send red flags to credit reporting agencies, which harms your credit. By sticking to the 30% guideline, it’s more likely that you will be viewed as a responsible consumer, someone who can be trusted to properly deal with larger debt limits. Another solution is to keep the balance only as high as you can manage to pay off each month. This removes monthly recurring credit card debt and the expensive cost of paying interest.
Hack #2: Establishing Credit
Don’t be shy; getting a first credit card marks a major milestone in achieving a responsible credit score. It is a necessary step towards building credit and requires financial discipline on part of the cardholder. After all, one or two impractical purchases could (if not paid off quickly) haunt you for months or years…depending how big those purchases are. Young adults don’t typically have a strong track record in this area.
A recent Qualtric / Credit Karma study found that 54% of young adults have accumulated more credit card debt than could be paid off within a year’s time.
Young adults should use their first credit card to learn financial responsibility. A little bit of discipline early on will bring lasting benefits for years to come.
The length of time a credit card has been opened will affect a credit score. Therefore maintaining your credit card responsibly over a longer period of time should help your score.
Hack #3: Debt “Avalanche”
Most debts are more than their principal (amount originally spent). Debts are the principal plus an interest rate. When paying off multiple debts there is a well-tested payment strategy known as the debt “avalanche.”
To carry out the debt “avalanche” maintain minimum payments on all debt balances while putting more money towards the debts with the highest interest rates. As each high interest debt is paid off, repayment funds are then directed to the next highest and so on. This method has become popular among consumers and is recommended by respected financial experts across the country.
Hack #4: Needs vs. Wants
One of the most important questions you should ask yourself is how a need vs. a want should be purchased. One rule will help you choose—purchases of necessity made on credit are acceptable, purchases of desire are not. Credit is a valuable asset and should not be taken for granted.
Limit your credit purchases to needs, and purchase your wants strictly with cash.
Hack #5: Budget
Many credit scores have taken hits through no fault of the consumer. Unanticipated expenses, costly emergencies, and medical bills are common threats to otherwise responsible people. Living within a budget that allows for the unexpected situations helps to maintain your credit score. To enforce this practice, live below your means and put money away for a rainy day.
No financial plan is entirely foolproof. Even the best of them fail under the “perfect storm.” But this is no reason to avoid planning and budgeting. Placing money into a savings account each pay period and cutting back on “wants” are common ways to support a budget.