I’ve always prided myself on having excellent credit, so I was shocked to find that my score significantly decreased this past summer.
After further investigation, I realized that two things caused this:
- I put much more on credit than I usually do.
- Bank of America cancelled a credit card I no longer used.
You see, credit scores involve a few things: how much you owe (30%), your payment history (35%), the length of your credit history (15%), new credit (10%), and types of credit used (10%).
By taking on that new debt and having my oldest card cancelled, I ended up with a lower score. Granted I still have a good score, but that’s because I’ve always worked to maintain my credit. Why?
Because your credit score runs your financial life
WHY CREDIT SCORES ARE IMPORTANT
For starters, credit scores help determine your interest rate on car loans and mortgages—as well as whether you’ll get a loan period. They can also determine whether you’re able to rent a place and, these days, whether or not you get a job.
Unfortunately, most people in their 20s have crappy credit thanks to student loans or credit card debt. Or, they are completely oblivious to their credit altogether. This is a huge problem, but it doesn’t need to be.
Having shaky credit in your 20s is pretty common. You’re young and starting out, so it’s understandable if your credit isn’t stellar. You have plenty of time to fix it in time for those big life purchases—like a mortgage.
And the truth is that credit’s not all that complicated. In fact, knowing how it works and keeping your finances simple will go much further than any gimmicks that promise to improve your score.
Here’s how I’ve managed to do this.
KEEP AN EYE ON YOUR SCORE
There are a ton of paid services for keeping an eye on your credit, but in all honesty, there are plenty of good, free options.
Credit Karma is my personal favorite for several reasons: it’s pretty accurate, there’s an awesome blog and Web community, they have a credit simulator (so you can see how certain actions affect your credit score), and did I mention it’s free?
PAY YOUR BILL IN FULL
I was always taught to pay my bills in full each month. If I racked up more than expected, then I would find ways to make extra money.
Living within your means and paying your bills in full may sound easier said than done, but it’s the most effective way I’ve found to maintain a good score.
If you rack up so much debt that you can’t pay it off in one shot, don’t be too hard on yourself—you’re certainly not alone. The good news is there are several ways to pay down your debt faster, from side hustling to using online debt payoff calculators.
For more ideas on how to pay off your debt faster, check out Carrie Smith’s (Careful Cents) dynamite blog post How I Paid Off $14,000 and Became Debt Free. She managed to pay that all off in about a year—so it’s definitely worth the read. No tricks and no gimmicks, just simple finances that work.
TIME IS ON YOUR SIDE
A bad credit score may negatively affect your financial life, but it’s never too late to improve it. It’s also easier than ever to maintain good credit thanks to online payments and free credit reports.
The key is to avoid the gimmicks and tricks you may hear about. Instead, keep it simple, and your credit score will improve and stabilize.
(For a full detailed description on how your credit score works, check out MyFICO.)
Have simple tips for keeping your credit score pristine? Share them in the comments.
(Photo: 401(K) 2012/Flickr)