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It's 2019, and like most people, improving your financial situation is probably on your mind. One area that you are probably wanting to improve is your credit health.
This makes sense, as your credit health can impact your life in many different ways, including the interest rate you get on a mortgage, whether or not you’ll get chosen from a sea of applicants for a home rental, your car insurance bill, and so on.
With the new year upon us, there is never a better time to think about your financial goals and work to improve your own financial health. To help you successfully stick to your financial resolutions in 2019, I want to talk about the healthy financial behaviors you can begin to incorporate to improve your credit health this new year.
Even though your credit health can have major implications on your life, that doesn't mean it's hard to improve. When you begin to transform your credit health, you may start to see a positive connection in your self-perception as financial wellness plays an important role in your general wellbeing!
I’ve always been careful about my financial habits, so my credit score has remained in good health over the years, and in turn, so has my self-perception. By keeping a strong financial standing, I’ve eliminated the need to worry about my score and instead, used my good credit to my advantage and remained motived to continue incorporating strong financial behaviors into my everyday life. My strong credit has also allowed me to secure low interest rates, use loans to my advantage, and go on vacations for super cheap by being financially savvy. Once you get your finances in a healthy place, you’ll see there are great benefits!
Here are my tips for healthy financial behaviors you can incorporate to improve your credit score this year:
1. Better understand your credit.
Understanding your credit and what goes into it is so important. I have met countless people who believe in credit score myths.
I still vividly remember a conversation I had with a friend about her credit card. She said she was paying the minimum payment on her monthly credit card bill. I asked her why she was doing that, and she replied that her monthly bill was only for that amount, so she thought that was all that she had to pay.
I was astonished! She really had no idea that she was hurting her credit, as well as causing herself to spend money on interest every month.
So, I want to first talk about what goes into your credit score.
Your credit score is a three-digit number that helps you assess how lenders view you and how you compare to other consumers.
There are three main credit reporting agencies, which is why you may occasionally see different numbers. The main three (TransUnion, Equifax, and Experian) calculate scores depending on the information they have about you, and your credit history and credit score may vary a little between the three of them.
According to TransUnion, there are six categories that impact your credit score. You should be cognizant of your behavior in each of the following categories:
- Payment History – Generally makes up 40% of your score: Your payment history has the largest impact on what your credit score will be. This category includes if you pay your bills on time, if you have missed a payment, if any of your bills have been sent to collections, and so on.
- Length of Credit History – Generally makes up 21% of your score: The age of your accounts DOES matter when it comes to your credit score. This is why it's usually a good idea to keep a credit card that you've had for a long time. I still have a credit card I opened when I was 18. It has no rewards, but it improves my average account age and demonstrates a longstanding responsible credit history. However, only do this if you know you won't go into debt.
- Credit Utilization – Generally makes up 20% of your score: This includes your balances, your utilization rate, and more.
- Total Amount of Recently Reported Balances – Generally makes up 11% of your score: Your statement balance is the amount you owe on your credit card as of the latest billing cycle. Paying more than the minimum required payment will help you improve your score.
- Available Credit – Generally makes up 3% of your score: This includes the specific type of accounts you have, such as whether or not you have credit cards, a mortgage, car loan, student loans, and so on.
- New Credit Accounts – Generally makes up 5% of your score: This credit score breakdown category includes things such as how many hard credit inquiries you have and how long it's been since you last opened a new credit account. It is important to remember that checking your own credit score does NOT impact this category as long as you receive your credit report from a company that is authorized to give you your credit report.
If you want to stay up-to-date on your credit report, your Annual Credit Report is a great place to start. You can pull a free credit report annually from each of the three credit reporting agencies and it will disclose important data that your creditors reported, like missed payments or bad debt. While your credit report doesn’t include an actual credit score, the data collected in your reports will shape your overall score and is a great indicator of the behavior change you need to make to improve your overall financial health.
2. Create a plan to improve your credit.
Once you understand the basics of your credit, it becomes much easier to take proactive steps to build your credit and improve your overall financial health in the coming months.
Here are my general tips for improving your credit health this year:
- Pay your bills and accounts on time. Late payments can hurt your credit score and your credit history.
- Keep your balances and utilization rate low. Maintain a low credit utilization, which means having access to credit but only using about 30% of your available limit. If your credit card balance is generally more than 30% of your credit limit, your score could be lowered.
- Inquire about raising your credit limit (but, don't spend more just because of that!).
- Pay your credit card bill before your credit card balance is reported.
- Keep your old credit card accounts open (if it makes sense, of course), so that you can lengthen your credit history and show a history of responsible behavior
3. Protect your credit.
An important next step of improving your credit health is to monitor and protect your credit.
Protecting yourself against fraud is important because fraudsters could take out loans, open credit cards, and more in a person's name, leading to missed payments and therefore delinquencies on your credit report.
To protect yourself in the new year, you can lock your credit with TrueIdentity, a free identity protection service that includes an easy one-touch credit lock, instant alerts, and unlimited refreshed views of your TransUnion report. Freezing your credit is also a free, easy and accessible option to protect and block access to your credit report (but without the real-time alerts you receive through TrueIdentity). If you would like to better understand the difference between credit locks and freezes, TransUnion has a helpful guide to provide clarity and understand the difference.
You can also read more about my tips for protecting your credit here.
For more information, tools and resources on credit management, visit TransUnion.com.
What are you doing to improve your credit score?
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