There is a lot of pressure from our society to have a good credit score because there are so many ways that you can be hurt by a bad credit history. If you lived a few decades ago, you wouldn’t even know what this would mean. But since credit has become a norm in this country, the financial industry had to find a way to make borrowing fair for everyone.
A good credit score means a consumer is responsible when it comes to borrowing money. They pay their dues on time, borrow only what they can pay back, apply for one credit account at a time, and keep their credit utilization low. If you have a good score, you can be trusted with a loan because you are a low-risk borrower. That means the lender or creditor do not have to worry about you missing out on your payments. Since you can be expected to pay what you owe, they do not have to protect themselves by giving you a high interest on the credit account that you want to open with them.
Now a good credit history means you need to use credit all the time. This where some people end up failing their credit scores. There is a big difference between using credit and being in debt. What some consumers fail to understand is that you can have a high credit score and not be in debt. But of course, that would mean using credit wisely. Unfortunately, this is a hard task for most people. According to a study done by ConsumerFinance.gov, a lot of people are credit invisible. This is probably because some of them choose not to use credit at all for fear that they will end up in debt. The report mentioned that as of 2010, 26 million Americans do not have a credit history – at all. Not only that, there is 19 million who have a credit history but it is so thin it cannot be measured. That is a total of 45 million consumers or 19.3% of the consumers.
If you are one of the people in this statistic, you obviously need to improve your credit. Of course, there are other people who do not have a good credit score because they have too much debt. Bottom line is, there are so many things that could go wrong for you if you do not do anything about your credit situation.
Improving your credit without lifting a finger
Some people are turned off about improving their credit because they feel like it is very hard to do. The truth is, it does not have to be difficult. Believe it or not, it is possible for you to literally improve your credit without doing anything. Here are some of them.
- Do not use your credit cards. One of the reasons why some people are in a bad credit situation is because of their high credit card balances. If you want to improve your credit situation, you need to stop using your cards while you pay them off. As you pay your balance, you are increasing your credit utilization rate – which is basically your balance to limit ratio. That will help you boost your score. Take note that you can live without a credit card and still have adequate credit history.
- Do not close your credit card accounts. Some people think that closing their cards will help them raise their credit score. That is not true. You will be getting rid of the temptation to use credit to spend more than what you can afford. However, you are not helping raise your score. In fact, you are making it worse because you will be damaging your credit utilization rate. If you really want to get rid of the temptation, you can keep your cards where you cannot reach it easily. In case you really want to get rid of some cards, you should close them one at a time. Another thing that you need to understand is that old credit accounts will do your history some good. The more old accounts that you have, the higher your score will be. So try not to close your account – at least, until after you improve your credit score.
- Do not apply for more credit. If you are still paying off other loans, you need to keep yourself from borrowing more money. Even if there is a good deal that makes home buying very appealing, you need to think about your existing debts very clearly. Be wise about opening more accounts because the more debt you owe, the lower credit score you will have.
These tips may leave you inactive but they will help improve your credit situation. We all know that there are various benefits to be gained if you have a great credit history. Fortunately, a lot of people have begun to take their credit situation more seriously.
According to an article published on NYTimes.com, consumer currently have a better credit standing compared to the first few years after the Great Recession. The national average is not 695 – at least, if you use the FICO scoring system. The article also revealed that almost 20% of consumers have a score that is above 800. By FICO standards, that is very good because their range is between 300 to 850.
Benefits of having a good credit score
Working to have a good credit score is simple but it is not an easy task. You need to remember that this is not something that you can accomplish overnight. But to motivate you to make the sacrifices needed to improve your credit, here are the benefits that you will gain.
You can get the best rates when you apply for a loan.
There are some purchases that is best bought with a loan. Take for instance a house. It is oftentimes too expensive to buy in cash. Instead of waiting years and money paying rent, you can borrow a mortgage so you can live in your own home. The money that you will pay on rent can be used to pay for your monthly amortization. As you make monthly payments, you will increase your home equity, thus increasing your personal net worth.
You are able to negotiate your terms.
Another benefit is being able to negotiate your terms for any credit account. This is true for both existing and new accounts that you will borrow. If you have a high interest credit card, you can call your creditor to ask them to lower it for you because you have been displaying good behavior. You are in a better position to say that you can transfer to another creditor who will give you a lower interest rate. Given your credit score, that may be possible. For new accounts, creditors or lenders do not have to protect themselves by imposing a high interest on your loan simply because you are a low risk borrower.
You do not have to give any security deposit.
Most of the time, people who do not have a credit history are forced to give a security deposit just so they can be serviced by utility companies or something similar. Some companies require this of people without credit histories because they want to be sure that their services will be paid.
You have the chance to build better relationships.
This might come off as a surprise but there is a study that can prove this. According to an article published on Credit, the Federal Reserve Bank released a working paper that revealed a connection between a stronger relationship and that of high credit scores. The study said that the individual credit scores of a couple can determine if they will break up or not. The lower the score, the higher the chance of them breaking up. There is some logic to this. We all know that monetary problems can be a cause of arguments. Some people admit that money issues drive them to divorce their spouse. If you want your relationship to last forever, then you know that you should improve your credit situation.
Remember that keeping your credit history in good condition takes consistent work. You need to keep on practicing good credit behavior to keep it up. Small mistake can cost you a good credit history. Set up the habits that will help you become a better money manager and you should be able to keep your credit life as good as it can be.