Obtaining credit and using it wisely is a key factor in maintaining a balanced financial life. The earlier you establish credit, commit to handling it responsibly and learn to make it work for your benefit, the easier it will be to make the most of this important financial tool. Effective and responsible use of credit and credit cards can offer many financial advantages, including access to a cushion of financial help when it comes to the unexpected events in life. Access to credit can help you handle your financial matters more effectively.
Here’s how you can develop and maintain a heathy relationship with credit:
1. Be a good credit risk. Financial institutions use information from three credit bureaus for determining your credit score (Equifax, Trans Union and Experian). Your credit score, which can range from 300–850, is very important when it comes to obtaining credit. The higher your score, the better credit risk you are. Your credit, or FICO, score* is based on five main financial elements: payment history, amount owed, new credit, amount of available credit and types of credit used.
2. Look for the best card. When it comes to obtaining a credit card, there are literally thousands to choose from. Make sure you obtain one that best suits your needs. Pay close attention to things like the annual fee (if any), annual percentage rate (APR), credit limit, due date, minimum payment, finance charge, grace period, cash advance fees, etc.
3. Pay on time. Making timely payments is the No. 1 way to keep your credit score high. Payment history accounts for 35% of the FICO score.
4. Reduce debt when possible. Paying even slightly more than the minimum payment due can eliminate a lot of debt over time.
5. Aim for low card balances. For example, if you have a credit card with a $5,000 limit, try not to let the balance reach the limit. It’s much better if you keep your card use at about 50% or $2,500 of the total available amount (some experts recommend a much lower ratio—15% maximum—or in this case $750). Try to pay balances in full monthly.
6. Cut up the cards that are not necessary. Keep the accounts open, because showing available credit is great for your score. But don’t allow yourself access to the cards for purchases.
7. New loans pull your score down. During the first year of most new loans, the loan can reduce your score until a stable payment history is established on it—typically one year. So take out new loans only when you need them.
If you would like additional information on obtaining credit cards or loans, reach out to the professional credit managers at Mountain America by calling 1-800-748-4302.