Credit remains a mysterious subject for many. If you’ve been developing good personal finance habits for more than a little while, your credit score has probably benefited. But until you get into the nuts and bolts of personal credit, you can’t maximize your credit score and derive the associated benefits.
Good credit comes from a variety of sources and habits. It’s a combination of sensible spending, credit cards with high limits, adequate credit history, and more. When people don’t understand these factors, they tend to overuse or underuse credit, both of which will be detrimental to achieving strong credit goals. As with all things in life, you’ve got to find the right balance with personal credit.
First of all, it’s important to think about your credit history from the perspective of a lender. Lenders have to ascertain your financial health from a record of behaviors that are accessible to them. They can’t look directly into your bank account, so they only have certain past behaviors to go on.
One example is how much credit you currently use, or have used in times past. This will include, mainly, loans, credit cards, and other outstanding credit accounts. Each of these accounts will have a limit, or the maximum amount of credit you could draw from that account before being cut off.
Creditors like to see consumers who have a high credit limit, without using much of it. From the creditor’s perspective, a person like this has their finances in order. They aren’t “living on credit”, but they do use it. A good rule of thumb is never to use more than 30% of any one credit limit. Even if this means moving debt around until every account is beneath that 30% threshold, this is a worthwhile maxim to follow.
Another area of balance to achieve is the amount of credit options you have access to. When individuals are constantly seeking new credit, it looks to creditors like their finances may be out of order. Overreliance on credit is a red flag also because it gives individuals access to a lot of money at one time. Theoretically, the person could max out each account, flee to Guam, and never be heard from again.
It’s important to have some credit in your past. A handful of active credit cards and a loan or two is the perfect balance for most people. As long as you make your payments and don’t exceed healthy balances, some people achieve good credit with more accounts, though this is not recommended for beginners.
Another important aspect of personal credit is paying your bills. People who have outstanding bill payments and other long-standing penalties will find that these issues weigh down their credit. Check your credit report to see what past mistakes continue to haunt your credit history.
There are other aspects of your personal finance life which benefit or harm your credit score, but these are perhaps the most important. In the end, sound financial decisions in your personal life will make the biggest difference in your credit score. Understanding these can help you naturally commit to beneficial credit behaviors.