By Holly Johnson on 3 September 2019
Keeping
an eye on your credit score may be more important than you think — even if you
haven't had to use it yet. After all, you'll need good credit if you hope to take
out a car loan, rent an apartment, or get a mortgage to buy your
first home. Believe it or not, your credit score can also impact how much
you'll pay for auto insurance — and whether you get hired for certain jobs.
If you
hope to refinance
your student loans with a private lender to score a super-low
interest rate, you'll need good credit for that. Want to take out a business
loan and follow your dreams as an entrepreneur? You'll need good credit for
that, too.
The
list of reasons to care about your credit score goes on and on, and the number
of negative ways poor credit can impact your life is nearly endless, too.
That's why, like it or not, we should all take steps to keep our credit scores
in tip-top shape.
How your FICO score is
determined
To
accomplish this goal, however, it helps to know exactly where your credit score
comes from. How can your entire credit history be represented by a three-digit
number? And what factors can influence your score now and later on?
The
most popular type of credit score is your
FICO score, and the FICO corporation offers some pretty
straightforward answers when it comes to the factors they consider.
The
five factors that make up your FICO score include:
·
Payment history: 35%
·
Total amounts owed: 30%
·
Length of credit history: 15%
·
Credit mix: 10%
·
New credit: 10%
When
you break down your FICO score this way, it's easy to see how you could use
this information to your advantage. Overall, the best FICO scores go to those
who learn to play by the rules with each of these factors and exhibit better
credit behavior than most of their peers.
How to create an
excellent payment history
Based
on the above percentages, you'll see one factor that should be especially easy
to stay on top of. It may take time to pay down debt to decrease the amounts
you owe, but you should be able to pay your bills early or on time, right?
Your
payment history is one FICO score determinant that you have absolute control
over, and this means you have the potential to make a big positive impact. To
polish your payment history, make the following money moves. (See also: 8
Money Moves for the Newly Independent)
Set up all your credit
cards on auto-pay
If
you're someone who is prone to forgetting about your bills or paying them late,
it can help to set all your bills up so the minimum payment is made on your
behalf before your payment date. You can typically do this by connecting your
credit card accounts to your bank account and selecting automatic payments.
While you can still pay your cards off manually each month, setting
up auto payments ensures you'll never be late if you simply forget.
This
strategy can be tricky if you rarely keep extra money in your bank account,
however, so you may want to consider saving up a "buffer" so any
automatic payments made don't cause an overdraft.
Pay your credit card
bills more than once each month
If
you're not interested in setting up automatic payments on your credit cards,
you can also consider paying them off more than once per month — and even once
per week. Not only can paying your credit card bills more than once per month
help you avoid late payments, but it might also help you stay on track with
your budget and spending goals.
Here's
a good example of how this might work: Imagine you budget $750 per month for
groceries and gas. If you only checked in on your credit card bill at the end
of your billing period, it might be easy to spend more than you budgeted in
these categories and others.
If you
checked in on your credit card bill weekly and made payments each time, on the
other hand, you'd have a better idea of how much you're spending throughout the
month and be in the best position to avoid an ugly end-of-the-month
surprise.
Look for ways to
automate your other bills
Also,
remember that bills other than your credit card bills make up your payment
history, and that your mortgage payment and car payment can also play a role.
If you're able, setting up automatic payments for these bills can help you
maintain a perfect payment history and avoid a ding on your credit score.
If you
have a credit
card that earns rewards, setting up all your bills to be paid
automatically with a credit card instead of by check or electronic funds
transfer can boost your rewards haul each year as well. And provided you pay
your balance in full each month, the rewards you earn can truly be
"free."
Institute a weekly
financial check-up
Finally,
it always makes sense to plan a weekly meeting with your checkbook, your bills,
and anyone you share your finances with. This is especially true if you're
trying to live on a budget or spending plan since you'll need to check in with
your spending fairly regularly to see where you're at.
To be
more specific, it can be helpful to set aside some time every week to check and
see which bills you have due, how much you've spent in regular categories, and
how much of your budget is left for the month. Just remember that you're more
likely to stick with it if you commit to a specific date and time for your
meeting, such as Saturday mornings or Monday nights.
Final thoughts
Your
payment history makes up the bulk of your FICO score, but it's also one area of
your life where you have the utmost control. Any steps you can take to create a
perfect payment history can only work to your advantage, so make sure to get
started today.
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