It doesn’t matter where you started on the credit totem pole whether it’s in the 400s, 600s, or 700s. Lower scores only dictate how much longer the rebuilding process will be. What does matter is actively searching for new ways to take control of your finances, and not going down with the ship if you see your credit score sinking.
The three major credit reporting agencies of Experian, TransUnion, and Equifax have a padlock on all U.S credit information. Your credit score snitches to potential lenders on how you handle your money, which could end up costing you a pretty penny if you wanted to dabble in real estate or start a business.
If I knew you weren’t reliable in repaying a debt, why in the world would I loan you money?
For lenders this answer is easy: They wouldn’t
Those three digits in your score shape the foundation of your personal finance journey. And while it’s still possible to buy things with cash, you could end up spending thousands unnecessarily. Work smarter, not harder. The benefits of a healthy credit line, especially for entrepreneurs, allows you to explore avenues that would never be available with just pocket money.
It’s free. Literally. You’re only a few pixels from the search bar, I’d give it a go (https://www.annualcreditreport.com/index.action).
Federal law states every credit holder holds the right to a free credit report from each of the 3 bureaus annually. Experian, TransUnion, and Equifax are now offering free online reports through April 2021 because of COVID-19.
Reviewing your credit report lets you analyze what’s potentially hurting your score and what steps you can take to mend it. Misinformation in your credit report can damage your credit indefinitely if left untreated.
Do not apply for every new credit card promotion you get in the mail. I get a couple of promotions in the mail every once in a while, and they all get to happily share the same space in the trash. Opening new lines of credit to increase your credit score is more so rooted in strategy and timing.
Applying to too many loans or credit cards will earn you our first villain phrase of the day: Hard Inquiry. Hard inquiries occur when you’re trying to establish new lines of credit or apply for a loan. While “soft” inquiries don’t affect your score, hard inquiries can be brutal to your credit score if too many credit lines are trying to open at the same time. Hard inquiries stay on your credit report for two years, so stay wary! This is why the timing of opening new lines is so important.
Anytime a new line becomes available your credit score may drop slightly but that’s expected of a hard pull from credit agencies. A healthy credit mix – revolving credit, charge cards, installment credit, and service credit – has to be molded together correctly with the Average Age of Accounts (AAOA). This topic is explained rather easily in the previous credit article on the BWR Blog, but the timeline of your credit is just as valuable as the limit on your loan.
The longer the history, the stronger your score. Adding credit lines as you become more financially stable is the right way to go with this one.
Cut the credit cards up or lock them up in the vault. I’m a fan of both methods personally. Whatever you think is necessary to stop tirelessly swiping your card needs to become a reality.
I’ll paint a sort of vivid picture for you. Let’s say you have a credit card with a $5000 limit and you decide to splurge on a few designer fits worth $3500 (Brand of your choosing, but try to think high end for the example’s sake). Your credit utilization rate is now over the 30% safety net and this could impact a quarter of your total score. Credit card utilization is the balance that you are carrying on a credit card compared to your credit card limit.
The sweet spot with using your credit card is under 30% utilization – real perfection is around the 7% marker. If you let your balance rack up for too long, the interest charges for edging closer to your maximum limit is going to hurt. Balance minor spending with your credit cards by normalizing paying off the debt before the next bill cycle. Your score should increase over time by incrementally paying that credit debt and maintaining on-time payments.
I doubt you’ll see an 800-850 credit FICO score overnight. Managing credit takes time and dedication, especially if you’re playing from behind. Taking advantage of business credit will change the roadmap of your business long term, from an experiment to an empire.
Credit fundamentals 101 teaches everything you need to know to build and maintain outstanding credit.