In the modern age, getting rid of debt has various implications. There’s the simple idea of lowering bills, living a debt-free lifestyle or simply putting yourself in a position to save money. But there is also the on-going concern of keeping your credit score intact.
We live in a loan-oriented society and, for most of us, borrowing is critical. We need a car or can do better financially if we buy a home instead of rent sometimes. We want to start a business or pay for tuition to live better lives. These are not frivolous moments. A credit score is critical at important junctions in our lives.
You need some basic understanding of money to understand loans, but in the modern era it also pays to know a few tricks to helping your credit score that go beyond simply, “don’t make late payments, ever.” That’s obvious. But here are some less obvious methods of keeping credit scores healthy…
1. Have Fewer cards
Most of us fool ourselves into thinking that many revolving debt accounts – many credit cards in our wallets, in other words – means we are masters of our own fate. If we can manage many cards at once, that should keep a score high, we think. We think that will show up as a positive in our credit histories.
But the more cards you have, the more it works against you. It can look like your spending is all over the place and that you are borrowing to pay off other loans. Watch your spending and keep it consistent, especially with paying off the cards. It’s fine to have several cards once you’re responsible enough to use them, but go into it slowly.
2. Pay Twice A Month
Here’s a smooth trick that will help. Instead of paying your balance down to zero with one payment at the end of a month, do it in two payments.
One factor that goes into your credit history is how large of a balance you have in what is known as a debt to credit ratio. That means, if you have a $2,000 line of credit and you never borrow more than $50, you have a very low debt to credit ratio. Conversely, if you have a $2,000 line of credit and you borrow $2,0000 your debt to credit ratio is very high – 100%.
So, if the idea is to have a low credit to debt ratio, what can you do? You can ask for a larger line of credit and that usually will work so long as you don’t borrow more as a result of that. You can also keep the ratio low by paying bills earlier than they need to be paid – maybe twice a month instead of once. You’ve likely heard of this for your mortgage, but you can do it for credit cards as well.
3. Create Successes
Credit scores don’t just sit there at the highest level, because you aren’t borrowing anything. Think of a credit score as a value based on you establishing trust. If you have never borrowed, you probably don’t have an automatically high score. You most likely have no score.
You need to borrow and show lenders that you can handle a loan just as the contract expects you to. You can apply for credit if you have an income. Do that and then borrow small amounts and pay them off on time. This is how you establish your score.
4. Argue Yourself Out of Debt
If you are in trouble financially, you may need professional help. Head for a bank, find a financial adviser, discuss options with debt management firms, like Lexington Law, or find an attorney. But don’t expect any of the options involving negotiating lower debts or lower payments can help your score. In fact, you can do anything a debt repair agency can do on your own.
You can’t change history, so what’s there is there. What bankers, lawyers, debt reduction firms and others can do, however, is to stop your score from getting worse, but remember, if you have the discipline, you can do everything they can do. They are merely an option if you aren’t disciplined enough to make it happen.
Credit is like a slow river. There is a constant flow in one direction, so the points on your history that are lowering your score flow off your active record in seven years. But that’s the trick. Only time can erase the negative points on your record.
That doesn’t mean you shouldn’t argue down debt. But don’t argue down debt thinking that will expunge your record.
5. Don’t Apply for Credit You Don’t Need
Every time you apply for credit, it goes on your record. And just for that, your score can take a hit.
Why? Well, first, applying for loans at all means that you are thinking of spending in a risky manner (maybe the perfect score is no score at all). If you keep applying and getting turned down that looks like you are very persistently trying to spend beyond your means.
When the store clerk says, “You could apply for the store’s credit system to make the purchase. The worst they can do is turn you down,” that’s not accurate. Each application counts. Getting turned down repeatedly suggests you’re not taking the hint.
At The ATM
Should you go to the ATM and take out cash on a credit card or simply pay with the credit card? The answer is pay for the purchase with the card. Besides being expensive, borrowing cash continually just looks a bit more out of control than making purchases on credit and paying off the bills on time every month.
It would seem borrowing cash versus paying with a credit card should be neutral on your score. But that’s not how it is reflected. If you buy with a card and pay on time you are establishing your history as a good loan risk. If you borrow cash on credit, that looks suspect. Why would you borrow cash when you have other ways of obtaining cash that don’t involve borrowing? It doesn’t help your score to borrow when you don’t have to and borrowing to have cash in your hand always looks like you’re borrowing when you don’t have to.
Photo Credit: Yuri