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💰 Understand your credit score
Preston Victory
January 22, 2025
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Welcome, Future Early Retirees.
Ever heard of a credit score? Think of it as your financial attractiveness score. Just like how you might judge someone's looks from across the room (though we know it's what's on the inside that counts), lenders size you up with a credit score when you're looking to borrow money. The higher your score, the more appealing you are to lenders, resulting in sweeter loan terms like lower interest rates. Today, we're diving into the layers of this financial enigma, exploring what makes up your credit score and discussing some strategies to boost it sky-high.
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Understanding your credit score
Understand What Makes Up Your Credit Score
Your credit score is not a mystery; it's calculated based on several key factors:
Payment History (35%): Always pay your bills on time. Late payments can significantly drag your score down.
Amounts Owed (30%): Keep your credit utilization low. Ideally, try to use less than 30% of your available credit.
Length of Credit History (15%): The longer your credit history, the better. Don't close old accounts unless necessary.
New Credit (10%): Avoid opening several new credit accounts in a short period.
Credit Mix (10%): Having a mix of credit types (credit cards, mortgage, auto loans) can be beneficial if managed well.
Pay Your Bills On Time
This one cannot be stressed enough. Even one missed payment can harm your score. Set up reminders or automatic payments if you often forget due dates.
Monitor Your Credit Utilization
Try to keep your credit card balances low. If you have a credit limit of $10,000, aim to keep your balance below $3,000. If you're close to your limit, pay down your balance before the statement closing date.
Check Your Credit Reports Regularly
New Credit (10%): Avoid opening several new credit accounts in a short period.
Errors: Mistakes can happen. Check your credit reports from the three major bureaus (Equifax, Experian, TransUnion) for inaccuracies. Dispute any errors you find. Fraud: Regular checks can help you catch fraud early, protecting both your score and your identity.
Keep Old Accounts
Open If you've paid off a credit card or loan, consider keeping the account open. This can positively affect your credit history length and your credit utilization ratio.
Be Cautious with New Credit
Each new credit application can lead to a hard inquiry, slightly lowering your score. Also, too many new accounts can make you look risky to lenders.
Diversify Your Credit
While not necessary, having a mix of installment loans (like car loans or mortgages) and revolving credit (like credit cards) can show lenders you manage different types of credit responsibly.
Consider Credit Building Tools
Secured Credit Cards: If you're starting from scratch or rebuilding, a secured card can help. You'll need to deposit money as collateral, which then becomes your credit limit.
Credit Builder Loans: These are small loans held by the lender in an account while you make payments, helping to build credit without immediate access to the funds.
Patience is Key
Building or repairing credit takes time. Don't expect overnight miracles, but consistent good behavior will yield results.
Educate Yourself Continuously
The world of finance evolves. Stay informed about changes in credit scoring models or new financial products that might benefit your credit journey.
Remember, a high credit score isn't just about impressing banks; it's about establishing your financial integrity and securing your financial future. Keep these tips in your toolkit, and watch your credit score soar.
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