Step 9 of 12 to Financial Wellness: Improving Your Credit Score

This year, we’ve been bringing you one way each month that you can travel a bit more on the road to financial health. Over the past few months, we’ve shown you how to track your spending, create a budget, work toward ridding yourself of debt, tips to talk about money with a significant other, tips to practice mindful sending, how to pay it forward, paying yourself first, and how to know when to indulge.

This month, we’d like to talk about three little numbers that have a really big impact on all aspects of your financial life.

Your credit score is a crucial part of your financial health. The three little numbers measure the capacity of your credit, the proficiency of your money management and your fiscal responsibility. An excellent credit score can open the door to large loans with better interest rates, as well as employment opportunities and more.

On the flip side, a poor credit score can be a strong impediment toward building wealth, funding large purchases and finding gainful employment.

Let’s explore the best ways to build and maintain an excellent credit score.

Have at least one active credit card.

Many consumers mistakenly believe the path toward great credit is through swearing off all credit cards or never, ever using credit. However, building and preserving a healthy credit score requires having a credit card or two and keeping them active. If you’re just starting out, consider signing up for a beginner card, which generally features easy eligibility requirements and very little available credit. If you’re further along in your credit journey, be sure you have a minimum of two open cards and that you use them on a regular basis.

To keep your cards active without having an open balance, you can pay one fixed monthly bill, such as a subscription or monthly membership fee, with each of your credit cards. Set up an automatic monthly payment for the bill by linking your subscription to your credit card, and then set up an automatic monthly payment for the credit card, too, by linking your checking account to the card. Choose to have the money transferred before the bill is actually due. This way, your cards will be open and active and you’ll never have a late payment, which would negatively impact your credit score. Several months of using your cards responsibly will generally help move your credit score upward.

Work on paying down debt.

If you’ve landed deep in debt and can’t find a way out, now’s the time to work on kicking that debt for good.

First, choose your debt-crushing method: The snowball method works by putting all available funds toward paying off the smallest amount of debt first, and then the next-smallest, until all debts are paid off. The avalanche method works the same way, but pays off the debt with the highest interest rate first, and then the next-highest, until all debts are paid off. With the snowball method, you’ll see results quicker, but may ultimately pay more in overall interest. Choose the method that works best with your personality, goals and lifestyle.

Review your monthly budget to find a way you can trim your expenses, or look for a side hustle, and use the extra cash to maximize your payments toward the debt you’re working on first. Keep at it until you’re debt-free.

It may take a while to crush a mountain of debt, but showing the credit bureaus that you’re on track to pay off that debt can do wonders for your score.

Pay your bills on time.

Paying credit card (and other) bills when, or before, they’re due is a major factor in determining your score. Carrying an outstanding balance or being late with your payments shows that you are not timely with your bills and can’t be counted on to repay loans responsibly. As mentioned, you can set up automatic monthly payments for your bills so you’re never late. Just make sure you keep the account you are paying from well-funded to cover your payments as they come out. And, open your bills that come in the mail or into your email inbox in case your payment or terms have changed.

Bring down your credit utilization ratio.

Another crucial factor contributing to your score is your credit utilization ratio. This refers to the amount of available credit you have versus how much you actually use. It’s best to keep your utilization under 30%, or even 10% if you can. To that end, make sure you’re using just a little bit of your available credit each month. In addition, consider accepting offers for increased credit – as long as you know you won’t be tempted to rack up huge bills.

Keeping an excellent credit score is a key factor in financial wellness.

Need help with your budgeting and tackling your debt? Do you need a solid credit card to help you improve your credit score? That’s where we come in. CommonWealth One has the resources to help you get on track or get back on track. Our certified financial counselors are just a click or a call away!