Many younger Americans don’t really think about their credit score in their day-to-day lives, in fact some have never looked up their score at all. Others don’t know the range (the FICO score range, which most lenders use, is 300 to 850) or what constitutes a good or bad score. But then, a money milestone arrives, buying a new car, shopping for a first home, or applying for a private loan, and all of a sudden, that credit score becomes the most important number.
It’s important to remember that a credit score helps “lenders assess risk,” but it is not about you, the borrower, and your worth as a human being or even how good you are at your finances. It gets at some aspects of your financial well-being, but it’s not a complete picture.
Pieces of the Pie
Young consumers should think of their score as a pie made up of different pieces. The size of the pie is influenced by your payment history, debt outstanding, lines of new credit, your credit mix and the length of your credit history. In short, you boost your score by making payments and paying on time. Taking out new loans or opening new cards can lower it, as can missing payments.
But never opening a credit card or paying for everything in cash won’t help either. That overly cautious approach could actually hurt your credit score. It’s important for young consumers, in particular, to use credit to build their credit history.
It all sounds counterintuitive. But young people can follow some simple best practices to cut through some of that confusion.
Be careful not to max out a credit card or reach your credit limit. Financial Advisors and finance professionals say your credit score will thank you.
Opening and closing cards at random isn’t a good idea either. Instead, keep an old card open and use it for small purchases. Keeping a card active and paying off those recurring purchases monthly helps your score. And be mindful when applying for new credit: applying for every new store or airline card can ding your score.
But the most important thing to do is the most straightforward: Pay down debt on time, and consistently. Add a recurring reminder to your calendar so you never miss a payment on a loan or a credit card. You also can set up automatic transfers.
The Importance of Time
Keep in mind that your credit score is not a static number; those ebbs and flows may make you uneasy but accepting them and understanding the importance of building a credit score to improve your financial life is part of developing a long-term financial plan.
If you just made a large purchase, a mortgage, for instance, you’re fully utilizing your credit, but the amount will reduce over time as you make your payments. Time will establish your payment history, which is a big factor in improving your credit score.
Financial experts agree that time plays a huge role in establishing your reliability, which will, in turn, have an impact on your score. Keep in mind, a credit score isn’t something made or unmade overnight; it’s a long game.
Remember, slow and steady wins the race! If you have questions regarding your financial future and how to increase your credit score, our advisors offer complimentary first meetings. Schedule a meeting with us today, and we’ll help you figure out the best path forward.
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dvisory Services are offered through MRA Advisory Group, a Registered Investment Adviser. This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. The investments and strategies mentioned may not be suitable for all investors. Past performance is no guarantee of future results. Nothing herein, nor any attachment, shall be considered to constitute (i) an offer to sell, nor a solicitation of an offer to purchase, any security, or (ii) tax or legal advice.