by Zack O’Malley Greenburg
Forbes.com
A few simple steps can put you on the path to creditworthiness — or prevent you from falling off.
A few simple steps can put you on the path to creditworthiness — or prevent you from falling off.
Five years ago Mikaal Bates was about to pool his money with some friends and make his first real estate investment. He didn’t expect any trouble on the credit score front, as he’d always paid all his bills in full and on time. But when Bates received the credit report he needed to get the loan and seal the deal, he found a nasty surprise: Thousands of dollars in unpaid phone bills racked up by someone who’d stolen his identity.
“I had bartended at a few less-than-reputable establishments, and someone had gotten hold of my social security number,” says Bates, an actor, now 31. “I ended up with an unpaid $2,000 bill for calls from the U.S. to the Dominican Republic. Took me close to a year before I got everything straightened out and had everything expunged.”
Bates’ situation is the product of illegal acts committed by malicious strangers, but plenty of people unwittingly do comparable damage to their own credit scores. Careless acts can eat into your credit score — and you may only discover the damage when there’s a car loan, mortgage or business loan on the line.
Fortunately there are a number of steps you can take to preserve and improve your credit score. The most important ones are matters of common sense, yet they’re too often ignored. First and foremost: timeliness, both with credit cards and other bills.
“With any kind of credit obligation it’s really critical to always pay on time,” says Ben Woolsey, director of marketing and consumer research for CreditCards. “Don’t ignore any obligations like student loans or utility bills or cellphone bills. Lenders are starting to scrutinize those sorts of things.”
Paying bills on time is just one of many steps savvy consumers should take. Another is to carefully manage your debt levels and the percentage of your credit lines you use. It’s never a good idea to carry a balance on your credit card; though the balance itself doesn’t directly affect your score, interest can cause the total to pile up quickly. And raising your debt-to-credit ratio (also known as utilization rate) does affect your score, says Jake Gibson of credit card research site Nerd Wallet.
Say you’re carrying a $4,000 balance on a credit card that allows you to charge up to $5,000. That high 80% utilization rate will damage your credit score more than a $4,000 balance on a card with, say, a $12,000 limit.
Paying off debt can help get your creditworthiness back on track. But think carefully about where to start.
“Get any revolving credit paid off,” recommends Steve Juetten, a financial planner in Bellevue, Wash. “Start with the card with the lowest balance and strive to have that one paid off first. Once it’s done, move to the one with the lowest balance and so on.”
[First Aid For Your Credit Score]
Other rules of thumb include requesting an increase to your credit limits and using different forms of credit. But don’t overdo it — holding more than four credit cards can start to damage your score. It can also hurt if the total of your available credit lines begins to exceed your household income. Even if you have always paid your bills on time, having $80,000 of available credit when you make $60,000 per year means you have the potential to spend yourself into debt, and that might make the next lender wary.
Above all, remember that building a good credit score isn’t something that can be done overnight.
“The biggest misconception about improving credit scores is that it’s something that can be done quickly,” says Juetten. “It’s not. It takes time.”
How to Make or Break Your Credit Score
Keep your credit cards paid off.
Though simply carrying a balance won’t damage your score, it will if your debt utilization rate (the ratio of debt level to credit available) starts to climb above 50%. Pay your balance in full every cycle if possible.
Pay your bills on time.
With any kind of credit obligation it’s really critical to always pay on time, even if you can’t pay in full. Late payments will hurt your credit score.
Use different forms of credit.
Holding a variety of lines — car loan, installment loan, mortgage, store card, credit card — can improve your credit score, as long as you’re mindful of the first two steps.
Develop a history of credit.
Maintaining responsible payment habits over time will increase your score.
Don’t overburden your credit lines.
It’s best not to use more than half of any given credit line, and even better not to use more than one-third.
