Helpful Tidbits for Using Credit Well
The credit system in the United States can be confusing – but once you learn the basics of how it works, you can use certain tips and tricks to your advantage to use credit well and maintain a good credit score. If you could use a refresher on our national credit system and how it works, check out our March blog post celebrating National Credit Education Month!
Below are just a few helpful tidbits for using credit well:
Charge the basics and pay off your card in full each month – there are a number of monthly expenses that you can typically count on, like gas, groceries, your phone and internet bill, and so on. Consider charging some of these bills to a credit card, and then make sure you pay off the card in full each month because you can be charged interest on the balances you carry over from month to month. This way, you are actively using and repaying your credit card to prove to lenders that you can responsibly manage revolving credit and build positive credit history. Just be mindful that of your credit utilization ratio, which will discussed on our next tidbit…
Aim for 30% credit utilization or lower, and pay more than once in a billing cycle if you can – credit utilization, or the amount of revolving credit you’re using compared to how much you have available to you, makes up a significant percentage of your credit score. The closer you are to maxing out your credit cards or lines of credit, the bigger the impact and the lower your score goes. It is recommended that you don’t use more than 30% of your available revolving credit – so a credit score hack is simply making more than one payment in a billing cycle if you can. For example, if you get paid every two weeks, you may consider making a payment with each paycheck so that the balance stays low and does not exceed the 30% recommendation. No matter how many payments you make in a billing cycle, make sure you are always satisfying the minimum payment due, and pay it off in full if you can.
Here’s one more tidbit to keep your credit utilization low: you may request an increase the limits on your existing credit cards if you’re eligible, but tread carefully – if this will tempt you to overspend, then it’s probably not worth it!
Set up payment reminders or automatic payments so you always pay on time – the most significant impact on your credit profile is making late payments, or missing them completely. Many financial institutions, including Cuting Edge, offer the option to set up email and text alerts for reminders to make loan payments. Better yet, most lenders will also set up automatic payments to your loans so you can essentially “set it and forget it!” Leveraging modern technology to help you avoid late payments is slick trick to help you use credit well.
Have some credit, but not too much, and only apply for new credit when you need it – if you anticipate ever needing an auto loan, a mortgage, or a loan from a lender, you will want to start building a positive credit profile. Although it seems counterintuitive, you often need a credit history in order to get a loan because lenders want to see demonstrated proof of how you’ve handled it in the past, while considering other factors such as how much income you have and how much other debt you owe. But how do you get started building a credit profile without already having credit? You may consider a secured loan or secured credit card, which is secured by money that you keep on deposit. There is no risk to the lender because your money is locked up at their institution should you fail to repay, and you begin building a positive credit history by making on-time payments.
It also may be tempting to accept every credit card offer you receive in the mail, but carrying too much revolving credit (such as credit cards and lines of credit) can make you look risky to a lender because you have the capacity to max out your available credit and may not have the ability to repay it all. It looks especially suspicious when you take on a lot of credit in a short period of time, because that often indicates financial troubles…and it will impact your credit score. It’s wise to have a credit card of line of credit in case of emergencies – in addition to having emergency savings to fall back on – and smart to only apply for new loans and credit cards when you actually need them and can pay them back.
Regularly review your credit report and keep tabs on your credit score – there are so many ways to easily access your credit reports from all three major credit bureaus, as well as access your credit score for the most-used credit scoring models (such as the FICO score or VantageScore). For example, many credit card companies and financial institutions give you on-demand access to your credit score when you log into your account online. There are free apps and websites, such as CreditKarma and Nerdwallet, that give consumers access to simple credit reports, scores, and analysis based on their credit profile with select credit bureaus.
It’s important to keep an eye on your reports and scores for a number of reasons, including checking for fraud or identity theft, identifying any discrepancies or misreported data that could negatively impact your credit profile and scores, and making sure you are aware of what lenders will see when you apply for credit. This is especially important if you’re preparing to request a large loan like a vehicle or mortgage, because if there are any late payments, charged-off accounts or bankruptcies on your credit report, you may choose to wait until enough time has passed until those negative marks are no longer impactful or have been removed from your credit history. Every time you apply for credit, a “hard inquiry” is added to your credit report and may impact your score. Regularly reviewing your credit reports and various scores ensures that you can make smart decisions about how and when to borrow!
As your credit union, we want to help you learn the ins and outs of using credit wisely. Not only do we offer affordable loan and credit card options for your financing needs, but all of our Member Advocate Specialists are trained as certified financial counselors and can help you manage credit wisely, improve your credit score, and how to have a healthy relationship with borrowing. Reach out to us any time!