How To Be Credit Savvy In 2019

Unless you inherited millions of dollars and pay cash for everything, you’ll probably need to borrow money from time to time to pay for large purchases that you want or need today, such as a car or home. In return you’ll be asked to pay back the borrowed amount plus interest and any fees to a creditor by an agreed-upon date.

Simply put, that’s how credit works. But the difference between good credit and bad credit largely depends on how much and how often you borrow, how well you pay back loans and how well you monitor your credit history to dispute any errors or old accounts.

In short, that’s how you can be credit savvy. To that end, here’s everything you need to know.

Not only does having good credit make borrowing money more affordable (through lower interest rates), it’s sometimes used by potential employers and landlords as part of their selection process. In other words, your credit score is a reliable measure of your personal responsibility, especially when it comes to finances.

Just so you know, there are four types of credit: 

1. Revolving credit: Think credit cards, where you’re given a maximum credit limit each month from which you can make purchases against. If you consistently make your minimum monthly payment with interest, you can carry a “revolving” balance for as long as you need.
2. Installment credit: Car loans and mortgages are the two most popular kinds of installment credit, in which you agree to pay back a certain amount of money with interest each month for a certain number of months.
3. Service credit: Think power bills, cell phone service, gym memberships or any other service agreements with stores or utilities that you agree to pay for each month for a certain or indefinite period of time. Note that not all service accounts are reported in your credit history.
4. Charge cards: These are similar to credit cards, only you must pay back the total balance every month.

To help them decide if you’re a good candidate to loan money to, creditors, banks and other financiers usually check your credit score prior to opening a line of credit. In the United States, credit scores are determined and tracked by three major credit agencies: Equifax, Experian, and TransUnion^®. They independently track your credit history, open accounts, payment history and the amount and frequency of credit inquiries (including credit checks, which can negatively impact your credit score if performed often). 

Contrary to popular belief, your credit score isn’t determined by how much money you have in a bank account. It’s determined by how much and how often you borrow money, how well you pay back loans and how reliable you are when it comes to opening and closing new lines of credit over long periods of time.

In other words, someone with little to no history of borrowing money will have a lower score than someone who has a long history of borrowing and paying back loans on time. In order to do this, you can check your credit score with all three agencies for free each year or use Rocket Home^SM’s free weekly credit check with TransUnion^®.

Although you may be tempted to accept multiple offers of credit lines and cards from different companies, you should only apply for the amount of credit you need. In short, the more you borrow against your current income, the lower your credit score will be. Consequently, it’s wise to only borrow what you need.

Next, be sure to pay back all your bills on time. As you do this, you’ll build your credit score over time. And before taking out even more lines of credit, be sure to pay down any balances you already owe. As you do this, you’ll demonstrate to creditors and banks that you’re capable of paying back borrowed money plus interest without missing payments. This is exactly what they want you to do and everything you’ll need to do in order to keep accessing good credit.

Tips On Borrowing Money

Before you borrow any money, it always helps to compare loan interest rates and credit card promotions from competing and trusted lenders. What’s more, you should never borrow more than you need. Always consider the required payback amounts and dates in order to maintain a good credit history.

To keep a healthy credit score, try to keep your credit utilization ratio (your total balance divided by your total credit limit) around 30%. As your income increases, call your creditors to request a credit limit increase. When you apply for a new loan, be sure you have a low balance on all available credit cards. Use credit cards at least once periodically to keep each one active. Lastly, it helps to have a varied credit history that includes things like home loans, car loans and credit cards.

In summary, being credit savvy is all about responsibly borrowing the right amount of money, paying it back on time and proving to creditors and banks that you’re as good for them as their borrowed money is for you.