How to Ensure Financial Stability with a Good Credit Score
Financial setbacks occur daily to people nationwide — emergency auto repairs, job losses, medical expenses, etc., happen to us all. These can impact our credit scores and make it very difficult to be financially stable.
Most of us do not think about improving our credit scores, especially while we are still struggling to meet basic expenses. However, credit scores are essential as they ultimately affect our financial stability.
Why Are Credit Scores So Important?
You do not think about your credit score often and, like most Americans, maybe checking them rarely. However, the record of your financial transactions will be used to determine your credit scores, which in turn will affect your ability to get a new car, buy a home, have credit cards, rent an apartment, and so on. Poor credit scores can affect your financial decisions significantly, which is why you should review and work on improving your scores. Low scores can cost you hundreds of thousands of dollars over your lifespan.
Information Used to Calculate Your Credit Score
- Your payment history forms 35% of your credit score. This is the #1 factor in determining your scores, so paying consistently and on is vital for improving your scores.
- The utilization ratio makes up 30% of your credit score. It is the amount you owe as a ratio of your total possible credit limits. To maximize this part of your score, you should be using less than 10% of your available credit. Of course, if you can pay off a credit card each month, that is even better.
- Length of credit history forms 10% of your credit score. It is the amount of time for which you have been using your credit, including any credit cards, auto loans, etc.
- New credit makes up 10% of your score. Every time you apply for new credit of any kind, the consequent hard credit inquiries will have a small, negative effect on your score.
- Type of credit affects 10% of your credit score. It refers to the kind of credit you have, e.g., too many credit cards would negatively impact your credit score (often because you are paying more interest on these than you would on an auto loan or home mortgage).
How Can You Improve Your Credit Score For Greater Financial Security?
Establish Your Budget
Having a budget is the only way to track your expenses and your monthly bills and to know how much you are spending on each item. You cannot reduce your expenses if you do not know where you are spending money. Many people are surprised about how much they spend on “little things,” e.g., daily coffee purchases.
Lower Your Debt
Lowering your debt will help ensure more significant savings on interest and fees. Start by paying off your smaller debts and then work towards the larger ones. All the while, you will want to make at least the minimum payments on all your recurring debts. Having a repayment strategy will make a significant difference in your ability to lower your debts.
Build a Financial Cushion
Saving money is a habit that anyone can adopt. Even if it is just $25 a month, the amount will eventually add up. With increased earnings, you can gradually increase the amount you save. Sticking to your budget and cutting down on unnecessary expenses will help grow your monthly savings.
Make sure to set aside some savings for an emergency fund that can be used anytime there is a cash emergency or unexpected expense.
Check Your Progress
Changes in your spending and saving habits cannot occur overnight. However, you can ensure the same with a little discipline. Check your financial status every month, if not more often. There are many free budget tools on the internet, and almost every community has professionals who can help you get started with your first budget.
Celebrate Your Success
When you start seeing results celebrate your success. Just be careful not to overthrow your budget by overspending on your celebration!