The Do’s and Don’ts of Credit

In my opinion, this is something that should have been taught in school. We spent all that time learning trigonometry and calculus, but never about our credit scores, which affect us so heavily in life!

Some believe that it’s a conspiracy, but I just think it’s a bit of a travesty. When we aren’t taught how to manage something as important in our society as credit, how can we be expected to succeed at it?

Either way, I have put together a short list of some things you can do (And some you should never do) to help you stay on top of your credit score!

First of all, I want you to remember, I am not a finance professional. Rather, I am a REALTOR, and at one point in my life had to rebuild my credit. So this article is not a professional guideline, but a list of tips from my successes and failures, and that of those around me.

Your credit score is basically the result of an algorithm that was put together to figure out how likely you are to repay your debts.

Payments

I talk a little bit about payments later in this article, but I wanted to touch on it again, because it’s that important. One 60 day late payment can bring your score down 200 points, for up to 18 months! By far, the most important factor in your credit score is paying on time.

You can recover from late payments, it will just take some time. You have to keep your accounts in good standing for 12 – 24 months to start seeing your score turn around, but eventually it will.

Accounts

The number of accounts that you have open, that stay in good standing, can have a substantial impact on your credit score. 3 – 5 accounts is not enough. Credit Karma recommends at least 11.

But the trick is keeping them in good standing! Maxing out a card here and going a month or two late on a loan payment there will absolutely destroy your credit score! It’s important to remember that credit cards should be used in moderation, and never to a point of hitting your credit limit.

So, how do you keep accounts in good standing?

It’s really all part of planning ahead. Obviously you can’t plan for things that are unexpected, but you can plan to budget for those things. Make sure that when you are opening new accounts, or making purchases on a credit card, you are planning ahead and working with your budget.

Debt to income (DTI)

DTI is a big factor with credit, as well as your finances.

Now that every industry is lined with professional salesman, it can be hard to get a straight answer out of anyone about anything, but especially a loan.

The reality of it is that you want your debt (your monthly payments) to be at about 35% of your income. This is a safe area that will leave you plenty of breathing room for the day to day.

Credit Cards

Credit cards are like the water of credit, They can help you float, or help you sink. If you know how to use a credit card, and act intelligently with it, you can easily add 45 points to your score in two months. If you don’t know what you’re doing, you can take 200 points off in three months.

Here are a couple pointers on how to maximize your credit score with your credit cards –

  • Use your credit card to a max of 30% and pay it down to 10% every single month.
    • You can easily add or lose 45 points with this method right here. I have seen it happen both ways!
  • Keep them open
    • Letting your credit card accounts close can easily cut a lot of points off your score. But you have to keep them in good standing, that’s the key!
  • Pay that bill
    • One single 60 day late payment can take 200 points off your score. Yeah, that’s right, your first 60 day late payment will absolutely tank you. That would be going from 740 to 540, which is too low to buy a home
  • Use it wisely
    • Make sure you are planning ahead and budgeting correctly. There is a theme coming together!
  • Don’t just pay the minimum payment!

Loans

The biggest rule about loans is the same as the others, keep it in your budget, and plan ahead!

Just because you can afford that $450/month car payment right now doesn’t mean you will be able to in 6 – 12 months!

It’s very common for people to take out a heavy loan because they make a lot of money in their current job… but they hate that job. Then they get stuck there because they took out such a heavy loan. Keep an eye on the other factors in your life before making such a big decision.

Loans are similar to credit cards because one late payment can easily drop your score. Beyond that though, they really have nothing more in common.

However, loans are the backbone of your credit score. Afterall, your score is just a number representing the likelihood of you repaying your debts. So, your loans – always the same amount due, planned beginning and end – will be your foundation to a strong credit score!

This includes student loans!

Mortgage

When you get a mortgage, your credit is going to take a big hit at first. That’s just how it goes, taking on a loan of a few hundred thousand dollars will really mess up your debt to income ratio!

But that’s okay, after a while of making the on time payments, you will see a drastic swing in the other direction. A mortgage will help your credit score more than a lot of other factors over the years. It’s all about making those payments on time.

Disputes

Identity theft is basically an epidemic right now. It’s so easy for people to get your information and open accounts! It’s happened to me multiple times!

When you look at your credit score, dig deep into every account to make sure everything looks familiar. If anything doesn’t, dispute it right away. The process of getting these things off of your report takes a long time, so it’s best that you start the process right away!

Fortunately, most companies know how common this is, and they are very helpful in the process.

When you read through this article, there are a couple of key points that come up over and over; Budget, Plan ahead and, Don’t miss a payment!

These things seem pretty simple, but they are what get people in trouble most often. So keep this in mind the next time you are planning a purchase!

And if you are interested in buying or selling a home, click the button below to contact me!

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See also

how to fix your credit with Credit Karma

First Time Home Buyer’s Guide To Buying A Home

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