28. Have a (Near) Perfect Credit Score

Aw yeah, we’re into the exciting stuff now!  I’ve been putting myself through a crash course in financial literacy.  In the past, my track record with money and long term planning has been sub par.  I’m not a stranger to the overdraft.  These days, however, I’m determined to be a productive member of our society.  A good place to start is to establish good credit.

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What is Credit and Why is it Important?
cred·it
ˈkredət
noun 
1. the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.

Somewhere along the line, someone decided that in order to be a responsible person, you must have good credit.  Credit just means that you’ve purchased things before you paid for them, you promised to pay for it later, and the seller trusts you to pay for it later.   As an adult, it’s hard to navigate the world without a good credit history.

'I actually am living the American Dream:  I'm paying off my credit card debt.'

Having good credit indicates that you are a GD responsible adult and people should trust you with their stuff.  In NYC, for example, landlords or management companies will (more often than not) ask for the credit score of potential renters.   Banks will look at your credit scores before giving you a loan.  Big purchases, like cars or property, often require a good credit score.  Generally, any instance where you will be making payments over an extended period of time, the other person wants to know that you are someone who pays their debts and will do so on time.  (Also, I have friends who won’t date anyone with bad credit… but that’s a whole different story.)

What is GOOD Credit?
So, how does your landlord know if you have good credit?  This is usually indicated by your credit score.  The most common is the FICO score, which rates your credit from 300-850 (the higher the score, the better credit you have!).

Everywhere I’ve looked has given me a different breakdown of the credit ranges.
FICO states them as:
Exceptional: 800 or higher (I’m just trying to be exceptional in all things, you know?)
Very Good: 740-799
Good: 670-739
Fair: 580-669
Poor: Under 580

creditgraphic
Graphic from NerdWallet.com


What Factors Go Into Your Credit Score?
If you don’t have credit (I get it, I was off the grid once too) or have bad credit, there are ways to establish good credit.  If you want help/real time overviews of your credit, I recommend signing up for a Mint account.  Mint is a budgeting, goal setting, and credit monitoring website (owned by the same company that does TurboTax).

Here are Mint’s recommendations for improving your credit score:
1. Pay your credit card bills on time: This feels self explanatory.  If you pay late or miss a payment, this negatively affects your score and can negatively affect it for YEARS after.
2. Don’t max out your credit cards every month:  Every card has a credit limit.  In order to keep your credit score in good standing, don’t use a lot of your available credit.  There’s no hard and fast rule for how much of your credit limit you should use, but most people recommend using less than 30% of your credit limit before paying it off.
3. How old is your credit?: The longer you’re a responsible credit user, the better.  If you need to build credit, many banks have a starter card, designed to help you start building a credit history.  My first card had a $300 credit limit.  After about a year of responsible credit use, they upped my limit.
4. How MANY credit accounts do you have?: The government and big banks are out to get us.  The man wants to keep us down and in debt.  We know this, we’ve seen the movies.  Creditors like to see that you have multiple accounts and loans and manage them responsibly.  If you have multiple accounts, this can factor positively into your credit.
5. How often are you applying for credit?: Like romance, it’s good to give creditors a little space.  Don’t ask them to dinner too often.  Having too many credit applications on your record can negatively affect your score as well.  According to Mint, credit inquiries stay on your record for two years; and if you have too many inquiries, it raises red flags and lowers your score.  Try not to apply more than once or twice within two years.
6. Avoid derogatory marks on your credit report: A derogatory mark can indicate mishandling of finances.  This could be bankruptcy, late bill payments, missed loan payments, etc.  These marks go on your credit record and negatively affect your score in the long term (7 to 10 years!).  If you receive a derogatory mark that is incorrect, you can file a dispute.  Keep an eye on your accounts and make sure to report any fraudulent activity.  If the derogatory mark is correct, follow the above 5 guidelines and wait patiently.  You should start to see your credit score bounce back within two years.

Happy spending, friends!  Let me know if you have any other tips and tricks!

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