Every working-class individual should place tremendous value on their credit score and should do everything within their power to make sure their score stays as high as possible. After all, it’s your credit score that determines your ability to obtain a loan to buy a home, buy a car, make significant home improvements, or make any other major purchases in life. If you have poor credit, you either won’t get a favorable interest rate or you may be denied for a loan altogether.
Ever wonder what specific factors go into determining your credit score? As you might imagine, there are multiple data points that determine how a person’s credit is viewed to the outside world. The most prevalent factors include:
- Payment history
- Outstanding balances
- Length of credit history
- Applications for new credit accounts
- Types of credit accounts (mortgages, car loans, credit cards)1
If you have a long credit history, have consistently made loan payments on time, paid off loans in a timely manner, and don’t have an array of outstanding balances, your credit score should be solid. If you haven’t made timely loan payments and have a multitude of outstanding balances on everything from your car to your home to your couch, television, computer, and dining room set, then your credit score is going to be low. Most people are going to have a home loan, student loan, and a car loan at some point – big ticket items like that can’t be purchased with cash by most working-class people – but it’s wise to avoid making payments on less expensive items like computers, televisions, furniture sets, lawn mowers, etc., whenever possible, even if you can do so with zero interest. The more outstanding credit balances you have, the lower your credit score will be.
Credit card debt has sunk many a person’s credit score, especially with young people who may not be seasoned enough yet to manage money responsibly. Buy now and pay later is an alluring trap that anyone can fall into, and many older adults struggle to manage credit properly as well. As you might imagine, it’s in your best interest to pay off your credit card statement in full every month. Life can throw curveballs at you and that can mean sometimes you have no choice but to charge things you can’t pay for within 30 days, but a prolonged track record of not making credit card payments on time will torpedo your credit score faster than anything, to say nothing of the large amount of interest you’ll end up paying over time.
Do everything you can to not fall into this trap, like setting aside three to six months of living expenses as an emergency fund so that you don’t have to rely on charging purchases you know you can’t pay off the following month. Your credit score will thank you.
It is advised that you check your credit score regularly from a credit score service like FICO or one of the three major credit reporting agencies: Equifax, Experian, or TransUnion. If your credit score is between 670 and 739, you’re on solid ground. A score between 740 and 799 is very good, and anything over 800 is considered excellent. If your score is below 650, you should make it a priority to work to get your score higher.
Source:
1 “Understand, get, and improve your credit score,” USA.GOV, July 2, 2024, https://www.usa.gov/credit-score
Article provided by Robert Cleary, a Senior Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, who can be contacted in the New York Bryant office at (212) 847-6501.
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