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Tips For Maintaining A Good Credit Score

October 4, 2011 · 27 comments

in Personal Finance

How often do you hear commercials where someone is trying to sell something to those “even with bad credit”?  I heard one just a few minutes ago where a used car dealer in Detroit will give you credit regardless of how many foreclosures, repossessions or bankruptcies you have had.  Nobody will be turned down!

For many people, this sounds like the perfect solution.  I mean even if you have the world’s worst credit history, you still want your own cool wheels, right?

What they don’t tell you in the commercial is what interest rate will be charged on these loans.  I can tell you what my guess is though: an astronomically high rate.

How You Can Avoid Being A High Risk Borrower With A Cruddy Credit Score

The process of maintaining good credit is simple.   All you have to do is this:

  1. Only allow yourself a small amount of credit. When I was in college, credit card applications showed up in my mailbox constantly.  Because I was broke, I applied to a few of them.  I believe I had credit cards with Sears, Penney’s, Hudson’s, and a generic Mastercard.  I had no business having that much credit considering I was a student making $7.00 an hour and was working 16 hours a week.  Not only could I charge purchases on my credit card, I also had the ability to withdraw money from my credit card at the ATM, which can be very dangerous.   I ended up putting some of my graduate school tuition on my credit card, which was incredibly stupid.  The allure of minimum payments drew me in, and it took quite a while to pay that balance off.  I would have been much better off just taking out a bank loan instead. (I couldn’t get enough in student loans to pay for tuition.)  Now, I really didn’t charge much on my credit cards except necessities and tuition.  However, not everyone is so careful.  When that new credit card shows up in the mail, some view it as a license to spend.  DO NOT DO THAT.  I recommend that you just have one credit card with a low credit limit when you are building up your credit score.  (And forever if you have trouble controlling your spending.)  Pay that balance off every month and you will have won half the battle.  (If you MUST carry a balance, do not carry a balance that is greater than 30 percent of your credit limit.)  Also, do not open and close credit cards at will.  One credit card with a long history of timely payments is more highly regarded than 5 cards that have been open and closed, even with timely payments.  (Assuming just one account was open at a time.)   
  2. Minimize Your Fixed Expenses.  When you are just starting out, it can be tempting to buy as much living space as your salary allows.  Maybe you were cramped up in minimalist accomodations in college and you want to spread out a bit.  DON’T DO IT.  Think about how much space you really need to live, and only buy or rent living space that will fulfill the space necessary.  The same type of thinking is true with a vehicle.  Do you really need satellite radio in your first car?  Does your car need to be an upscale model that will make you look prestigious?   No, it doesn’t.   If you spend minimally on your fixed expenses, you will be much better prepared in case a crisis strikes, and you should not be at risk for missing payments and ruining your credit score.  
  3. Organize Yourself.  Even the wealthiest people take the occasional hit on their credit score just because they forget to send in a payment here and there.  Paying a bill online takes about 2 minutes, and setting up automated payments takes even less overall time.   Make sure you have a set system for making and tracking payments that is followed each month, just so your credit score does not get slammed for laziness or disorganization.
  4. Stay Employed.  OK, so this may be easier said than done, but you need to always focus on having an income stream.  If your industry is volatile (or if it isn’t), work on building a second revenue stream. Keep your resume updated and always be on the look out for new opportunities. Whatever you do, do not stagnate. Think of your career as a living thing that needs to be nurtured and grown.

In the end, the key to maintaining a good credit score is to earn more than you spend (which is key for every aspect of your financal life), and structure your bill paying so that it is nearly impossible to miss a payment.  If you are prepared for possible economic downturns and also have an ample amount saved, you should never have to worry about driving down to the used car lot in Detroit to procure a vehicle for yourself.

 

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{ 24 comments… read them below or add one }

Moneycone October 4, 2011 at 7:58 am

Taking cash out of your credit card is a big no-no! Cash advances have a higher rate than your purchases. Mine is as high as 19%!

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Kris October 4, 2011 at 8:03 am

Oh believe me, I know! I was young and dumb and desperate!

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The Biz of Life October 4, 2011 at 8:07 am

We only have two credit cards, and have kept those same cards for a long time, pay them off in full every month. We don’t want, and don’t need any other cards, and resist the temptation.

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Roshawn @ Watson Inc October 5, 2011 at 8:16 pm

For people who use credit cards in this manner (i.e., only for the convenience), I suspect it is easier to maintain good credit. I assume there is less temptation when you KNOW you will pay it off at the end of the month.

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Kris October 6, 2011 at 8:36 am

Shawn, I know that since I have the mindset of paying it off every month, it makes me think twice. I am not really a spender anyway, so I am not really representative of the greater population I am guessing.

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Molly October 4, 2011 at 8:16 am

Paying off your home mortgage will actually give you a higher credit score (which can mean a higher home insurance rate)! It hasn’t dissuaded us but it really does suck.

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Kris October 4, 2011 at 10:31 pm

Molly, do you mean lower credit score? I wasn’t quite sure what you meant. Then again, it is late, I am tired, and who knows what I am thinking….

If it does go down when you pay off your mortgage, that is totally unfair. What a racket.

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First Gen American October 4, 2011 at 8:46 am

I continued to live like a college student for a few years after I got out of school. It wasn’t until I moved in with my husband that he demanded I get rid of my crappy college furniture, plus he had nicer stuff he inherited. Yeah, my 1980’s sectional sofa was ugly but it was comfy too.

I’m afraid to see what my credit score has done since we paid off our mortgages. I wonder how big a hit it took.

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Matt Wegner @ Financial Excellence October 5, 2011 at 2:00 pm

I’m also curious how my score has gone down since paying off the mortgage. It may affect my insurance rates at some point but I’m ok with that ’cause I have no debt payments. It does suck though – I get rid of my debt but my credit score says I’m more risky. Where’s the logic there?

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Kris October 6, 2011 at 8:37 am

It is like a scam. There should be a HUGE bonus for paying off your mortgage. Then again, if you don’t have a mortgage (and won’t be getting one again), then maybe you don’t care as much about your credit score? Regardless, that is ridiculous.

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Kellen @ Accountant by Day October 4, 2011 at 3:11 pm

I know where I live, you don’t even have to go for smaller living space, just don’t live in the “trendy” part of town. I have the same, if not shorter commute to work, my neighborhood is just full of more “working class” people than I think your average college student is used to living near. Essentially, the other young professionals don’t live near us, we’re “up and coming” though.
But if I lived in the trendy part of town I could easily pay twice as much for less space.

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Kris October 4, 2011 at 9:56 pm

That is a very good point Kellen. Whenever I watch ‘House Hunters’, I want to scream when these young couples want to live in the hottest part of town. They pay a premium for their home, and then you never know how long an area will be ‘hot’ for.

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funancials October 4, 2011 at 4:53 pm

When I was in college, the credit card companies would hand out free t-shirts while signing up for credit cards and offer free pizzas as well. Citi made a killing off of these college campus promotions. I can’t imagine how many desperate students suffered as a result.

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Kris October 4, 2011 at 9:55 pm

I have heard about these pizza parties at frat houses and such. The credit card companies weren’t as creative when I was in college, but if they were, you can bet I would have at least gone to the party. (I was broke, and who doesn’t love free food?)

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Squirrelers October 6, 2011 at 12:18 am

I recall a friend of mine from college telling me that he got a bag of m&m’s or some other similar candy, for applying to a card. Just think about how ludicrous that is. He was tempted as if he was a child. Funny thing is he was quite smart otherwise.

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Kris October 6, 2011 at 8:34 am

Your friend settled for candy and not pizza? I will admit that I am tempted if I spent a lot of money at a score I don’t have a card for (which is most) and they tell me how much I can save if I just opened a card. It is a catch 22. I wonder if M&Ms would tempt me even more. 🙂

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radiologist October 6, 2011 at 5:41 am

Taking cash out of your credit card is a big no-no for me!! Thanks for posting such a very helpful blog

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Kris October 6, 2011 at 8:32 am

Thanks. I wish the ability to withdraw cash on a credit card had never been invented. But, it was, so people have to do what they can to limit spending and/or make more money!

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101 Centavos October 6, 2011 at 5:58 am

The rates on cash advances are nose-bleed high. Credit card companies should be wearing lots of bling and dress in jogging suits. Good tips, Kris.

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Kris October 6, 2011 at 8:32 am

Maybe they do dress in bling? I am so embarrassed that I actually did cash withdrawals some on one of the cards. It was just too easy. Again, a bank loan would have been a better idea…

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ruby @ digital marketing October 7, 2011 at 1:06 pm

Thank you for sharing this wonderful blog… As for me, I avoid withdrawing cash from my credit card. I’d rather not purchase what I want if I don’t have enough cash…

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Kris October 10, 2011 at 11:34 pm

You would have to beat me in the head with a stick to get me to withdraw cash from my credit card. I was young and desperate when I did it. In other words, I was the target market for typical credit card companies.

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Australian Finance March 15, 2012 at 8:38 am

great post. These are the very good tips for making a good credit score. Very useful tips are given in this blog anyone can reach good credit score by follow these tips.

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Payday Loans @ website July 17, 2012 at 3:41 am

I have one more tip. If you don’t have anyone who is willing to help you get started with credit and you are unable to get a credit card of your own, apply for a secured credit card. Secured credit cards require you to deposit money with a lender, and your credit amount is generally limited to the amount of money you have deposited. Be cautious when it comes to selecting a secured credit card – scams abound. Check out bankrate.com for a list of legitimate secured credit card issuers. Some secured credit cards become conventional credit cards after 12 – 18 months of on-time payments.

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