Good credit means better financial freedom. It turns into a cycle: higher credit makes it easier for you to negotiate lower rates and penalties on your mortgage. Credit can be a powerful tool when applying for a home.
Credit can affect many areas of your life: applying for any type of loan (credit card, a line of credit, mortgage), setting up a cell phone contract, renting a car, and even getting a job.
Credit scores are based on experience and history.
There are a few things taken into consideration when looking at your credit score. Here are the rules for getting good credit:
RULE #1: DO NOT MAX OUT YOUR CREDIT CARD
If you get too close to your credit limit, people who are reviewing your credit history will interpret this as you can’t manage your money and you have to rely on credit to get you through your life. This is called your balance to limit ratio and is a rule not many people know how to follow. Even if you pay off your balance every month, maxing your credit card to the limit is going to hurt your credit.
An easy guideline is to never go over the 50% mark of your limit.
TIP: Do not close a credit account! Closing an account and increasing the limit on another means you could be using a higher percentage of your total limit. Closing a credit account is a red flag on your credit report.
RULE #2: NEVER MISS A PAYMENT
While this rule is an obvious one, it’s one of the more important rules for keeping your credit score high. Missing a payment shows up as a black hole on your credit score and it tells lenders that you could miss a mortgage payment, making you a riskier investment.
If you’ve missed credit card payments, it is not the end of the world. There are still options to saving your credit.
Read our blog post on how to recover from bad credit: 3 Steps to Repairing your credit history
TIP: The best credit score comes from showing good habits over a long amount of time. Paying off your credit card balance every month gives you the best credit score.
RULE #3: HAVE A MINIMUM OF TWO TRADE LINES
What is a trade line?
A trade line is a credit account which credit reporting agencies pull up when your credit is being examined.
It is best to have a few types of trade lines. This shows that you can handle different types of credit. However, this only applies when you are responsible with all of your trade lines! If you have 3-4 trade lines and they all have a high balance to limit ratio, this hurts your credit.
List of acceptable trade lines:
- Personal loan/Car loan
- Credit card
- Personal line of credit
- Mortgage *most mortgages don’t report to the credit bureau*
It is best to have a minimum of two of these and for each to be a minimum of 5,000$ each. This gives you a diverse credit history, with at least 10,000$ of credit under your name.
Lenders will look at your credit report and see that you have the responsibility of different trade lines that you can manage by making the proper payments and not needing to go near your limit.
TIP: Don’t go overboard on applying for credit. Applying for a few trade lines in a short amount of time is another red flag. It is better to slowly build and grow your credit history over an extended period of time.
HERE’S A SHORT CUT
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