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Your credit score is crucial to your life in many ways. While it’s not a life or death matter, your credit score determines whether you can buy a car or a home. Even if you are approved, if your score isn’t as good as it could be, you’ll pay a lot more in interest than you otherwise could. After bankruptcy, you have the chance to make the most of your clean financial slate. Here are some credit score dos and don’ts to bear in mind while re-establishing your credit.
Credit Score Dos
Understand why you need a strong credit score
Your credit score demonstrates to potential creditors (and even employers and utility providers) whether you can be trusted and are worth the risk. While a credit score doesn’t tell the whole story about you, in this day, it is considered an important measure of a person's financial health and risk.
By using credit wisely, you improve your chances of getting that apartment or job you want, a low-interest loan, affordable auto insurance, and a whole host of other services and opportunities. The hard truth is that your credit score matters.
Read the fine print on finance agreements
To protect your credit score and finances, you must read and understand agreements before you sign them. This goes for bank documents, credit card terms and conditions, and especially loan documents. Agreeing to terms you don’t understand is a bad idea.
With credit card T&Cs, you should look for fine print about when and why the card issuer can raise your interest rate, charge you additional fees, or close your account. Lenders might also write in conditions where your interest rate can be raised above the initial rate.
Pay at least the minimum due
Credit card statements always have the minimum payment and the date it’s due at the bottom of your monthly statement. Always pay at least that amount and several days before the date due to give the payment time to process.
If you miss even one payment or pay less than the minimum, your credit report will take a very hard hit. You might think skipping just one payment won't matter, but it does. In fact, the first time you miss a credit card or loan payment is when your score may see the greatest damage.
Set a credit score goal
You probably wouldn’t get into your car for a road trip without knowing where you’re going and having a route picked out to get you there. The same should apply to your finances. You should have a credit score goal and a path to achieve the goal.
Shoot for a score of greater than 700 and take steps to reach that goal. 700 or higher will qualify you for better credit offers including higher balance credit cards at lower interest rates and preferable deals on a car loan and mortgage.
Stick to low utilization on credit lines
Credit utilization is the percentage of your revolving credit lines you’re using. Revolving credit includes credit cards and store cards. You should try and never have more than 20% utilization, but the truth is carrying no balances over month-to-month is the best approach.
Unless you have an emergency crop up, never use your cards for anything you can’t pay off in full that month. Also, consider paying down your card balances on each payday, twice a month, to avoid interest charges and accidentally running late on payments.
Credit Score Don’ts
Cancel credit cards
Another factor in your credit score is your average age of credit. This is a simple calculation done by adding the number of years each credit card has been open divided by the number of cards. Don’t close older accounts without a good reason or it can drag down your score.
Sometimes older card accounts might have higher interest rates, but if you don’t carry a balance, interest rates don’t matter so much. However, if an older card has a high annual fee, that’s a good reason to consider closing it. Just make sure your average age won’t take too much of a hit.
Apply to lots of new accounts in a short period
For every credit card you apply for, a hard credit inquiry appears on your report. Each hard inquiry lowers your score and stays on the report for a couple of years. Over time, the impact lessens, but if you apply for many at once, your score can drop significantly.
Also, don’t apply for a new account you won’t get. How can you know if you’ll be approved? There are many credit card forums where you can research specific card offers, see what profiles are approved, and make sure you meet the basic requirements before you apply.
Co-sign debt for someone else
If you co-sign a credit application with someone else, you’re putting your credit fate in their hands. Even if the person is someone you trust, if something shakes their finances such as divorce or job loss, they may miss payments and damage your credit.
It might be better to help your friend or family in other ways such as making them a small loan or helping them research a loan or credit card where they can be approved without a co-signer. This can be a win-win and ensures your friendship will stay intact.
If you’re just coming out of bankruptcy, now is the time to work on re-establishing your credit score. Check out Credit Score Keys to find out how to fast-track a better score.