Thinking of big purchases? - Take care of your Credit!
Updated: May 20
Establishing a good credit score is useful for everybody, but especially if you think of bigger purchases like a home or a car in the near future, it is important keeping in mind the impact your financial actions can have on your credit score. Here are the most important things keeping in mind:
For building-up credit you should use a credit card, not a debit card. Paying your monthly credit card bill, establishes you a good credit. Using only a small portion of your cards credit limit is also beneficial for your score.
You should have a good mix of open credits (cards, cars, real estate). However you should not apply for new credit, if you don't really need them. As the average age of your credits is taken into account in your credit score, new accounts will cause a temporary decrease of the score. Also each credit inquiry from possible lenders will lower your credit score.
If you have existing debts, you should reduce them. There are different strategies for doing this, you have to find out which one suits to your personality and your situation. It is always recommended to free-up some cash, even if it is only a small sum, and pay this towards your debts. There are two main pay-off strategies: Pay -off first the debt with the highest interest rate or pay the smallest debt back first. If you have difficulties in choosing your strategy, you can discuss your situation with a credit counselor or with a daily money manager.
Apply for a loan which is in line with your income-to-debt ration. As rule of thumb your total amount of debt payments (mortgage, car, all other debts) should be 40% or less of you monthly gross income.
Check your credit report before applying for a big loan: There could be errors in your report which need correction. You have the right of obtaining a free credit report per year from each of the three main credit reporting agencies.
Know your credit score: this number in the range from 300 to 850 defines for the credit risk you are posing to a potential lender. The higher your score, the less is the risk and the better condition you will get for your credit. A credit report does not contain your credit score. Often you can get it for free from either your bank or your credit card. Or you can get it for a fee from the credit reporting agencies.