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Your credit score indicates to lenders and other financial institutions how well you manage debt. This information helps them determine whether to accept your loan application and what rates to offer.
In the US, consumers are managing credit well, with the average credit score reaching 716 by the second quarter of 2023. That said, there are still Americans struggling with debt. If you need help managing your credit score, you can use this article to maintain healthy credit practices over time.
Understanding Credit
Your credit score dictates your ability to take on debt. Common examples of credit are student loans, credit cards, car loans, and home mortgages.
Through credit, you can borrow money to buy goods, solutions, or services, with the understanding that you will have to pay what you owe in the future. Aside from the borrowed amount, you must also pay interest and additional service fees, which can complicate credit management.
Today, lenders only extend credit if they believe the applicant can repay. By paying what you owe in full and on time, you build up trust or establish credit, improving your creditworthiness or ability to borrow again.
Lenders report your borrowing and repayment transactions to the three independent credit bureaus: Experian, Equifax, and TransUnion.
After reviewing relevant information about your credit history and credit accounts, the bureaus calculate a three-digit credit score for you. The numbers generally range from 350 to 800, with a low score indicating poor credit and a high score indicating good credit.
Good credit habits young adults should know
Building credit and spending wisely can be easier said than done. If you have Googled “Why can’t I check my credit score?” in the past, you might need pointers to help make the process easier. This section outlines the dos in managing credit to help keep you debt-free.
Review your credit score regularly
It is always wise to know where your credit score stands and how your recent transactions impacted it. Checking your score regularly can help you determine how your spending habits affect your scores. By doing so, you can also detect any potential issues and address problems promptly.
If you are actively working to improve your score, you should check it regularly to see if you are making progress. A rising score can give you positive feedback to maintain healthy spending habits.
If you check your credit report periodically, you will spot any inaccurate information that might crop up. For instance, if your statement shows a new account you did not apply for, you might be a victim of identity theft.
You can also try credit monitoring services to get a real-time look at your credit scores. These digital tools can help keep you on track to reaching your financial goals and help you maintain a good credit score.
Spend small amounts at the start
Some credit card providers target young adults when offering credit opportunities. While getting a credit card is not bad, you should start small and charge manageable amounts you know you can pay on time. This way, you do not get overwhelmed with interest rates when you pay late, which can happen with big purchases.
Categorize spending based on goals
Developing good spending habits is not only about saving money. It is also about making the best use of what you have.
To achieve this feat, establish a financial goal. Ask yourself what you want to achieve, then categorize your spending based on that plan. This way, you can control your expenses, which is crucial when keeping a low credit card balance and sustaining a long-term credit relationship.
Apply for a new account only when needed
Having several accounts and various credit types can be good for your credit score. It indicates to lenders that you are financially responsible and know how to manage your credit.
However, too many credit applications close together can hurt your creditworthiness. Whenever you apply for a credit or a loan, the lender runs a hard inquiry and requests your credit report. While one inquiry results in a minor drop in your credit score, several inquiries will be more noticeable. A constant stream of requests for reports may cause lenders to see you as a credit risk.
Spending mistakes to avoid
Now that you know what to do to maintain a healthy credit score, you should also know the mistakes to avoid when building credit. After reading, you will see where to be careful as you develop a foolproof plan to reach your financial goals.
First, do not get a credit card if you have enough cash to buy what you need. This way, you can bypass the hassle of paying debts and eliminate the need to pay interest fees.
To prevent fraud, refrain from providing your credit card information unless you are the one who initiated the transaction. Malicious actors are always on the prowl, looking for victims they can trick into giving their credit card data.
Another mistake to avoid is missing or being late when paying credit card bills. It may seem inconsequential, but late payments leave a mark on your credit card report, which can tank your score. You should also avoid opening a credit account shortly after opening another one since it may hurt your credit score.
Maxing out your credit cards is another money blunder most young adults commit. A maxed-out card means a high credit balance, which can adversely affect your credit scores. Future transactions may also be declined because you have hit your spending limit.
Use your credit card smarter and improve your credit score
Developing healthy spending habits is crucial to keeping your credit in good shape. Monitoring is vital to track your progress and keep your financial goals in mind.
Today, various credit monitoring tools allow you to check your credit score and report. These tools can alert you to even small changes, making them valuable for those actively trying to increase their score. With vigilance and consistency, you can quickly develop good credit habits and enjoy the financial benefits that go along with them.
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