Your credit history and credit score follow you for a lifetime. Avoiding loans or credit cards isn’t necessarily the best solution. Here’s how to keep a clean slate and know your numbers, so credit becomes a tool and not a cash-flow strategy.
Last week, I highlighted how a better credit score leads to offers for a higher credit limit = a better credit utilization ratio (if your spending stays the same).
This ratio—how you use your available credit—will boost or ding your overall credit score. Using less of your credit limit betters your ratio. But other factors weigh just as much – or more – in determining a credit score.
Here’s how it works: Each credit bureau records anytime you use a credit card/borrow money and builds a history for you. Upon request, FICO calculates a score based on your credit history. Because each bureau records your credit use/history a bit differently, you often have a different score for each bureau. Typically, the scores don’t vary much.
A score is based on these factors:
- 35% = Payment history – Do you pay on time?
- 30% = How much you owe – Outstanding balance per card/loan
- 30% = Utilization ratio – How much of your credit limit do you use?
- 15% = History – Had your card(s) long?
- 10% = New credit – Applied for new cards/loans recently?
- 10% = Other factors – Credit types in use, revolving credit vs. installment loans
The higher your overall credit score, the better rates you get for loans and service costs. Remember your credit score can change frequently, based on transactions. (Whenever you swipe your card to pay for a purchase, the credit extended to you is considered a loan until it’s paid off, hopefully the due date of the credit card bill).
So have you mastered your cards? Boost your credit smarts with these steps:
- To see how much you know, take this simple quiz:
- Check your credit history (free annually) at the official government site or call 800-322-8228.
- Each life stage has new credit challenges – check your to-dos…
If you’re younger than 30…Time to start building a good credit history:
- Take note of why you need a credit card and how to use one responsibly
- Understand credit terminology, especially the cash advance feature of credit cards
- Research card options before applying
- Choose a card to keep a couple of decades or more
- Opt for a card with no annual fee
- Pay your credit card bill in full – and on time – every cycle
- Keep tabs on your financial life (there are plenty of tech tools to do this!)
- Check your credit transactions as often as you check Facebook or Instagram
If you’re 30 to 50…Time to broaden credit relationships, reduce debt, keep a great score:
- Keep utilization ratios low as your credit limit grows
- Keep managing credit responsibly to get better rates when borrowing for a house, car, vacation home or other major purchase
- Make it a goal to build wealth not debt; pay off debt rather than transfer a balance to a new card
- If you add new credit cards, do not use more credit than you can afford – keep spending in check
- Strive to pay your credit card bill in full and on time every cycle
- Monitor your financial accounts, especially watching for fraud and identity theft
If you are over 50…Time to wean yourself from credit:
- Reduce your reliance on borrowing, aim for financial independence
- Pay credit card bills in full and on time, every cycle
- Opt to have fewer cards, cancelling those you do not use
- Remain diligent about checking your credit history and accounts
- Be aware that scam artists particularly target older adults
- Pay off mortgages or other loan balances as soon as possible
- Strategize to plan a retirement lifestyle that does not rely on credit
While using credit responsibly is a life skill that can help you acquire assets, remember the bottom line is about making wise financial choices to build wealth. Credit is only a tool, not a cash-flow strategy.