Take care of your credit, it will take care of you!

“Compound interest is the 8^th wonder of the world. [They] who understand it, earn it…[they] who don’t…pay it”

-Albert Einstein 

Managing one’s credit profile is probably the most talked about, and least understood, concept in personal finance. Googling “credit management” might just cause your computer to spontaneously combust…so keep a fire extinguisher handy! All joking aside, managing our credit profile effectively may be one of the most important parts of our overall financial health. A poor credit profile can negatively affect everything from getting hired for a job to your overall emotional well-being. So how does one go about “effectively managing their credit” and what are the areas we need to pay attention to in order to increase our “credit worthiness?” Here are the 5 areas that impact your credit score the most, the places to focus on if you want to improve your credit rating. 

1. On Time Payments: a history of on-time payments shows lenders that you can manage credit responsibly. A payment that’s late 30 days or more is often reported to the credit bureaus. This factor has a VERY HIGH impact on your credit score.
   1. Credit tip – set up autopay so you never miss a payment, or bill pay reminders to receive notifications when your bills are due. I set reminders on my phone, so I never miss a payment. Also, you don’t have to wait until your payment is due to make it. When you have the money, make a payment so you can avoid this “deadline” altogether. 
2. Age of your oldest credit account: the older your credit accounts are shows lenders how much experience you have responsibly handling your credit. Accounts between 8-24 years old put you in a “good” category, with about 65% of the population. This factor has a MODERATE impact on your credit score.
   1. Credit tip – keep your oldest credit account open and in good standing. This can help build a positive credit history.
3. Percentage of credit used: if you use too much of your available credit, you may not have enough credit when you need it. To lenders, this could be a sign that you may be overextended. This category has a HIGH impact on your credit score.
   1. Credit tip – using less than 30% of your available credit is a good goal. But keep in mind that using some available credit and paying it off monthly can be better than not using any credit at all. Also, paying off the balance before the close of your statement cycle helps to avoid finance charges. Know that date, and try to make payments prior to it, so you don’t have to pay more fees than absolutely necessary. 
4. Recent inquiries: having a few inquiries a year is normal. But people with too many inquiries within a short period could be seen as applying for multiple new credit lines, which is an indicator that someone could be financially overextended. No more than 2 inquiries within a 2-year span puts you in the “good” category with about 33% of the population. This category has a LOW impact on your credit score.
   1. Credit tip – if you’re shopping around for credit accounts like a mortgage or an auto loan, try to keep your inquiries within a short time period. Also, note that you are entitled to one free copy of your credit report every 12 months from each of the 3 major credit reporting agencies (Equifax, Transunion, Experian). 
5. New accounts in the past 2 years: if you open too many accounts in a short window of time, lenders might wonder if you’re overextended financially. This category has a LOW impact on your credit score.
   1. Credit tip – only apply for credit when you need it. And once you open an account, make sure to manage it responsibly by paying your bill on time each month and only using as much credit as you need. 

One of the most important things to keep in mind is that credit can be both your “best friend” and your “worst enemy.” A best practice is to only spend as much on your credit cards as you can afford, meaning you have the cash in your bank account to pay for whatever you are purchasing on the card. This may seem counterintuitive to why you have the card in the first place, but responsible use of your available credit is how you will increase your credit rating and show potential lenders that you know how to manage your debt effectively. Avoiding carrying balances across statement cycles is not always possible, so ensuring that you at least make your payments on time will give you the most beneficial outcome.