How to keep your credit healthy

A quick guide full of tips and tricks to grow and maintian your credit scores

What is credit?

To start, we must first understand what credit is. Since few people are rich enough to pay for things in one go, many people rely on borrowing money to pay for things they wish to acquire. Lenders, service providers, banks, and merchants grant you money or services with the expectation that you will pay them back. Your history is summarized in a file called your credit history. So the three big credit bureaus, Experian, TransUnion, and Equifax then give borrowers a credit score. This score means how trustworthy you are to creditors and companies in terms of your ability to pay them back. This is a 3-digit score with the lowest possible number being 300 and the highest being 850. Creditors or anyone who is in a position to lend money will use this number to determine if you are likely to pay them back on time or if they might not see that money again.

What we can do with credit?

A high credit score can open many doors for you, while a low one, can make many things harder. Here is a list of many things a good credit score can do for you.

The most common reason people think about when considering their credit score, is the ability to qualify for loans.

  • Personal Loans
  • Mortgage Loans
  • Student Loans
  • Car Loans
  • Payday Loans
  • Small Business Loans

Your score can determine if your loan is approved or denied, a higher score can also mean you get lower interest rates, which can save you money.

There are many things that you can qualify for with a good credit score. Having a good credit and payment history means that you are responsible and reliable. Meaning other are more willing to take the risk of helping you out, or offering you a better deal.

  • Smaller interest rates for loans and credit cards
  • Qualifyng for higher credit limits/ borrowing amounts.
  • smaller monthly insurance payments
  • Improving your chances of renting and finding an apartment.
  • Getting charged smaller deposits than others when renting.

  • Some jobs like corporate, military, Law enforcement, accounting, Banking roles, financial and lawyer positions will require you to have a good credit standing in order to qualify for a position.

    • How credit works

    Your credit history is summarized by the three major independent credit bureaus. This summary will include all of your past financial setbacks if your payments were made on time, any loans and credit cards, and outstanding balances that you have. The companies don't disclose the exact formula used to calculate your score but the resulting number, the FICO score, and VantageScore have been the standard go-to when determining your eligibility and trustworthiness.

    fico score pic

    The different types of credit

    There are four major types of credit you must know.

    1. Revolving credit
      You are given a borrowing limit that you must pay off every month. Partial payments are allowed. Most credit cards count as revolving credit.
    2. Charge Cards
      Mostly used by retailers. It can only be used at that establishment, but unlike credit cards, they must be paid off in full every month.
    3. Service Credit
      These are the services you are contracted with such as gas, utilities, phone services, gyms, etc. These companies provide you with services with the agreement that you will pay them each month. Timely payments are reflected in credit scores.
    4. Installment credit
      It is a loan for a specific amount that you agree to pay in equal amounts for a specific amount of time. This includes student loans, car loans, and mortgages.

    How to avoid hits to your credit

    Here are some tips to keep your credit growing

    1. Make all your payments on time.
      The quickest way people ruin their credit is by not paying their bills and loans on time.
      They might miss the deadline by a few days or a few weeks. Setting up automatic payments can help lower the chances of missing a payment.
    2. Avoid closing accounts that are in good standing.
      If you have a credit card account or a loan that is in good standing and you want to close it or pay it off all at once, it will lower your score by a few points. Since these accounts are used to calculate your credit utilization rate, closing them can lower your score by a few points. This is temporary, but it is a good idea to time it right in case you are looking for a job, an apartment, or trying to make a big purchase. You could wait a bit before closing the account or paying off that loan completely. This is especially important if your score is borderline two different levels.
    3. Manage your credit cards properly
      Only paying off the minimum balance can be risky because you are paying interest on the remaining balance each month. Debt can easily build up.
      Maxing out your credit cards, even if you can pay them off, will lower your score. Your credit utilization ratio will show that you are in more debt than normal, and it will put the lenders on edge. Learn more about credit cards and choose the right one for you here.
    4. Applying for too many credit cards or loans.
      Applying for a credit card, or loan will count as a hard inquiry on your report. It will go down by a point every time. If you get denied initially and keep trying; or if you open too many credit lines at once, your score will go down. The lender will think you are taking on a lot of debt at once. Which will make them hesitate to approve anymore.
    5. Not Using your credit for a long time.
      Not using your credit for extended periods will also hurt your credit. It is best to at least use your credit card for small purchases and set them up to be paid automatically. this way your credit utilization stays low.