As we celebrate America’s Independence Day, why not start working on your own financial independence by better managing your credit score. In working towards financial independence, your credit score is a crucial initial step to better financial health, as well as something that stays with you throughout your entire life.
Since credit scores are calculated from your credit report, it’s a good and accurate snapshot of your general financial health. How does credit score = financial independence? In a nutshell, your credit score is your key to having financial options. The higher your credit score, the more doors it opens. Credit scores impact almost every financial product, specifically approval for credit cards, ability to borrow money, and interest rates offered by lenders.
Everyone’s path to financial independence will vary, but addressing the five main components of a credit score is a foundation you need to build:
- Credit Card Utilization. This is a percentage of your total credit card debt to the total amount of available credit on your credit cards. High credit card utilization signals to lenders that you might be a risky borrower. Keep utilization under 30% every month.
- Payment History. Simple: Pay on time every month, without fail. This is, by far, the simplest yet most significant credit habit to adopt. Good credit scores are highly correlative to consistent, on-time payment history.
- Credit History. Do not close your oldest credit card unless you have serious reason to do so. Long, active credit history in good standing shows lenders that you manage credit responsibly and consistently over time.
- Total Accounts. One credit card doesn’t constitute good credit. People need to demonstrate an ability to manage credit across different types of products such as car loans, mortgages, and credit cards. A comprehensive credit profile reflects good credit management, which in turn will show in your credit score.
- Credit Inquiries. Don’t go crazy with applications when applying for a credit card, loan, or mortgage. Hard inquiries, conducted whenever you are applying for credit or money, ding your score by a few points and last for at least 2 years on your credit report. Multiple hard inquiries add up to more severe damage, so be picky and prudent when you apply for financial products.
Once your score starts hitting the 800s, light the fireworks and celebrate like it’s the 4th of July! Have a great weekend and good luck on your road to financial independence!
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