Credit 101

The 10 Credit Commandments

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Whether you are thinking of buying a home or getting a new car in the future, you need to pay attention to your credit. You can take certain actions now to be prepared when it’s time to make those big life decisions.

Here are 10 credit commandments that will help you on your road to better credit.

1. Thou Shalt Pay Bills On Time

It is no coincidence that this is the first commandment. One of the biggest factors of your credit score is your payment history. A late payment can result in a big ding. To ensure your credit score is where you want it, pay your bills on time. Make it easy by setting up automatic bill pay.

2. Thou Shalt Guard Personal Data

Take precautions to protect your identity. Be very stingy with your personal information so you don’t become the victim of fraud. You can’t completely prevent identity theft, but you can take steps to reduce the likelihood that you’ll be a victim. This means monitoring your credit card and bank accounts carefully.

3. Thou Shalt Be Informed

Know where you stand. Make sure you know your credit scores so you aren’t surprised when you go to buy a home, apply to rent an apartment or purchase a car. Check your scores regularly. You can get two of our credit scores for free every month with the Credit Report Card, a free tool that shows you the biggest factors impacting your scores. You should also pull copies of your credit reports – you can get them for free! – from each of the major credit reporting agencies. If you find errors, dispute them.

4. Thou Shalt Be Proactive

Don’t wait for collectors to come calling. If you can’t make your minimum payments, call your creditors or reach out for help from a credit counseling agency. Let them know you are having trouble but that you are serious about paying back your mortgage, student loans, etc. Often you can figure out a repayment plan that will work for your current situation and avoid having an account charged off and sent to collections.

5. Thou Shalt Not Cancel Old Credit Cards

Your credit score is partly based on the length of your credit history. So before you cancel your old credit cards, think about what it will do to your credit score. This doesn’t mean you should never cancel a card, but you should be aware of the impact.  If your card issuer charges an annual fee and won’t waive it, if you have a co-signer on the account who may run up charges you will get stuck with, or if you are tempted to overspend because you have the card, you still may choose to cancel it.

6. Thou Shalt Shop for Credit Carefully

You may not want to make too many big changes at once. While you will want to shop around for the best price and rates when you borrow, you want to be aware that too many inquiries into your credit can damage your credit score. Make sure you understand how inquiries work before you embark on a credit binge.

7. Thou Shalt Use Credit Cards Responsibly

Plastic can make it tempting to buy more than you can afford. But try to think of your credit card purchases in the same way you think of cash purchases – you shouldn’t spend more than you have. Make it a goal to pay off your credit balances in full every month.

8. Thou Shalt Pay More Than the Minimum

Your credit card statements will tell you how much you owe on the card in total and how much you owe for that month. But don’t be fooled into paying just the minimum. This will leave you paying much more in interest. Avoid making the minimum payment unless you are really strapped for cash or you are using the avalanche or snowball method to pay off your debt, which requires you to make minimum payments on all cards except the one you are trying to pay off at that moment.

9. Thou Shalt Stay on Top of Finances

Take steps to track your spending, create a budget and live within your means. Have financial goals – both long and short term – that you can work toward.

10. Thou Shalt Keep Ratios in Check

You want to make sure you are not maxing out your lines of credit (it’s best to use no more than 30% of available credit). If you are constantly at the top of your credit limit on your credit cards, your credit score will suffer and you will be considered high risk. Also, keep your debt-to-income ratio in mind. You don’t want to be overextended. In addition to the money stress this can cause, it can also prevent you from getting new loans or the lowest interest rates.

More on Managing Debt:

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