By Ivan Gonzalez, NYLAG Financial Counselor
March is National Credit Education Month and a great time to work towards developing and maintaining positive credit habits. Building a credit history and maintaining a healthy credit score is beneficial for many reasons, such as obtaining better interest rates on credit cards or loans, signing up for utilities without high deposits, and qualifying for specific housing opportunities. You can start taking control of your credit by simply learning how it works and understanding what actions can help you boost your score.
Here is what you must know:
1. How much you spend matters.
High credit balances can catch you by surprise if you don’t keep track of your spending. It is much easier to swipe a credit card without realizing the impact that purchase is having on your budget each month. A great way to avoid damaging your credit is by being aware of what is being charged on your cards.
Tips: You can track your spending by:
- Making a habit of checking your bank and credit card accounts regularly, on a weekly or a monthly basis if possible (online, on a budgeting app, or by reviewing your printed statements)
- Setting up email or text alerts for credit card purchases as a reminder of what you spend
- Using apps to track your budget. Some great examples are Mint, EveryDollar, and Goodbudget
2. Your “credit utilization ratio” is crucial.
Credit utilization is simply a comparison between your account balance and your credit limit. Some experts indicate that people should aim to have a credit utilization ratio of 30% or less. However, if your credit is relatively new, you should spend event less than this. For example: if your credit card has a credit limit of $2,000, you should try to keep your balance below $600 ($2,000* 30%). Be mindful of the credit limit for each of your credit cards.
- Tip: Maintaining your credit utilization below 30% can be tough, and sometimes spending more is inevitable. Some credit cards may offer you the chance to increase your credit limit. However, this is not a long-term solution and may even have an impact on your credit score. Always weigh the pros and cons of these decisions and reach out to a financial counselor if you need support.
3. Paying your credit balance on time is one of the best steps you can take.
Your credit score will vary based on the model used to calculate it. The FICO score model is the most widely-used model by lenders. This score considers payment history as the biggest factor, and it accounts for 35% of your overall score. Moreover, late and missed payments can make you incur up to $30 in late fees each instance, and can affect the interest rate that you pay.
- Tip: To avoid late and missed payments this, set up calendar reminders and consider making use of the electronic automatic payment features offered by your bank.
4. Credit report information is far from perfect, so double check your credit reports.
A 2021 study conducted by ConsumerReports.org found that 34% of the participants in the study identified at least one error on their credit reports. An unnoticed or overlooked error on your credit report could negatively impact your score and cost you more when looking to open new lines of credit.
- Tip: Take advantage of AnnualCreditReport.com and get a free copy of your credit report weekly until December 2023. (Afterwards you will have access every 12 months from each of the three major credit reporting companies.)
Still have questions?
NYLAG’s financial counselors can help you review your credit reports and your FICO score to develop a customized plan to improve your credit. They can also help you develop a plan to control your spending and start your savings
If you are currently working with a NYLAG financial counselor and have questions, reach out to them. If you are not working with us yet, click here to connect with us.