Financial Wellness Article Series: How to Establish Excellent Credit
Your credit score affects many of your monthly bills as well as deposits for new utility services. The cost of your mortgage, auto loans, student loans, insurance, rent, and credit cards are adjusted based on your credit score. If your credit score is too low, you may not be able to get credit. Credit scores typically range from 300 to 850. Scores above 700 are considered good with the 800s considered excellent.
So how do you know what your credit score (FICO) is and how can you establish excellent credit?
1. Start by determining your credit scores and look at the credit reports. You can look at creditkarma.com and determine your credit scores for free. It will also help you identify potential identity theft if you keep track of it.
There are three credit reporting agencies – Equifax, Experian and TransUnion. Just request a free credit report each year. There are often mistakes that you need to have corrected.
2. To establish credit, I would recommend you use a secured credit card. That means that you give the bank a certain amount and you can spend up to that amount. However, you do need to make timely payments on that card.
3. Do not spend more than you know you can pay for. This is one place where an emergency fund, sale of idle goods and/or a side gig comes into play. Instead of putting a doctor’s visit on the credit card, you can use your emergency fund.
4. Keep your credit balances low. One of the ways credit agencies determine your credit is based on your credit utilization ratio (30% of the score). That means how much do you owe in relation to how much available credit you have. If you owe $250 on a credit card but have $10,000 in credit, your ratio will be excellent.
5. Make timely payments on your debt. If you pay your balance every month, make sure it is on time. One late payment can lower your credit score. Making on time payments is a significant part of your credit score.
6. Do not get a credit card cash advance. This typically comes with a fee and higher interest rate and no grace period – making it a dumb way to borrow money.
7. Do not put yourself in a situation to declare bankruptcy. It will take 14 years to wipe that off your credit report. In the meantime, you have shown creditors that you do not handle your money responsibly. If you can get credit at all, it will be at a high interest rate.
8. Do not, under any circumstances, borrow money using a title loan or payday loan. They are extremely high interest (I have seen contracts for 570%) and you will have great difficulty paying them back. That means if you borrow $100 you will pay back $670. Then it is easy to borrow more money to pay the first loan back and you become stuck in a never-ending cycle. I had a benevolence client that had 7 loans with no way to pay them back.
9. If you always spend less than you make, you will not have to worry about a credit card bill at the end of the month. When you pay by credit card that you have not paid off by the end of the month, the item you purchased costs more because of the interest.