Everyone knows that keeping your credit score healthy is critical to maintaining and improving your finances. But your credit score can impact you in ways that go beyond strict money matters in ways you never thought of. If left unattended, a bad credit rating can have a devastating effect on all parts of your life.
Typically we think about our credit score when we are thinking of borrowing money – when buying a house or a new car, or when refinancing a mortgage. Lenders aren't the only ones who look at your score, however. Increasingly, insurance companies and even prospective employers examine your credit habits as a way to evaluate your behavior, financial and otherwise. A poor credit rating can lead to you being denied coverage, paying higher premiums or interest rates, or even worse – not getting that new job!
Your credit history has been tracked and scored, based on complicated formulas that are not made public, by the three major credit bureaus – Experian, Transunion and Equifax – for as long as you've been borrowing money or using a credit card. You can't erase any problematic financial history, but there are several things that you can do now to repair or improve your credit score.
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Know your score. You can order a free copy of your credit report by at annualcreditreport.com or myfico.com. Verify the information the ratings agencies have and correct anything that is inaccurate by sending a registered letter explaining the error to the agency in question. (You may also want to write to the creditor that created the error and ask that they rectify their mistake.)
Stay in touch by ordering your report from only one of the three reporting agencies now, and request another four months from now, and the other four months after that. This allows you to check your credit for free throughout the year without paying for a credit monitoring service.
Repeat this process once a year. By tracking your score and eradicating errors as they happen, you'll give yourself the best shot at qualifying for the best credit.
Pay your bills on time going forward. Sounds obvious, but nothing can do more damage to your score than late payments. Set up auto payments from your checking account using online bill pay to be sure that you don't miss a payment.
Don't cancel paid-off cards. Your credit score reflects in part the number of accounts that you have open and in good standing, as well as the length of time that they are open. Keeping that long credit history open and in good standing can help to improve your score.
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Manage your credit limit. Try to keep your balances to less than one-half of the total amount of the credit line as this can help improve your score.
Limit the number of credit inquiries. Every time you apply for credit, an inquiry is made. Too many of these can signal financial difficulties and lower your score. This means you should think twice before agreeing to apply for a store credit card, even one that promises to save just 10 percent on today's purchases – it could cost many times that in negative credit score consequences.
You don't have to completely change your life to keep your credit healthy, but if you spend a little time educating yourself about your credit score, and taking a few simple steps to maximize your score, you can minimize the possibility that an unpleasant surprise next time will change your life for you.
Geoffrey S. Cable is managing director at Destination Wealth Management and has been in the wealth management field since 1989.