While everyone is probably more concerned with whipping their bodies into shape for beach season, it’s important to not forget about our credit scores as well. That might sound a bit odd, but studies show the difference between an out-of-shape credit score and an excellent one can be hundreds of thousands of dollars over the course of your life. Not only could we all use that money in this economy, but a bigger wallet might even attract more attention than a flat tummy.
Kidding aside, maximizing your credit standing is essential in this day and age. In addition to the interest rates you’ll get on loans and lines of credit, your credit impacts the insurance premiums you pay, your ability to lease a car or rent an apartment, and even the jobs you’ll gain serious consideration for.
That last part is perhaps most significant, as good jobs are tough to come by these days and most of us need the cash. As of last month, 7.5% of people is unemployed, according to the Bureau of Labor Statistics. Outstanding student debt has surpassed $1 trillion. And we’ve racked up more than $82 billion in new credit card debt in the past two years alone, as many try to stay afloat without much money coming in and others struggle to adjust to post-recession spending realities.
The number of employees referencing credit report data for hiring decisions has declined in recent years (see table below), but still nearly half do so. You don’t want to be turned down for a job that you’re otherwise qualified for just because you make some mistakes managing your personal finances in the past and never fixed the damage done.
We therefore sought the opinions of a few professors who’ve studied the credit scoring process in order to bring you some valuable insights into how employers utilize credit data in the current regulatory landscape as well as how reliable credit scores actually are. You can check out what they had to say below, and then reference the tips that follow in order to make this summer a successful one for both your social life and your career.
Tips for Improving Your Credit Standing
Before we get to the specific tips, it’s important to touch on a few nuances related to credit scores and reports. (You can also read more about this in CardHub’s Education Center).
Credit scores are numerical manifestations of your financial responsibility based on information in your major credit reports and determined using a variety of different metrics. No one has just one credit score, however, as there are a number of different scores out there and lenders/employers use different ones – often customized with proprietary models. It’s difficult to determine which score a particular decision maker will use, and you also have to pay to see a given credit score.
That’s why it’s both costly and inefficient to try to check your actual credit score. A better approach is to leverage your right to a free copy of each of your major credit reports (i.e. Experian, Equifax, and TransUnion) every 12 months. This will enable you to evaluate the extent and nature of your credit history as well as parse your file for inaccurate information that might drag your credit standing down. Your credit standing is essentially whether you have excellent, good, average, or limited credit, based on your credit data and irrespective of the numerical range of scores used by a particular credit scoring agency.
With that said, your credit building priority should be to infuse your credit files with a steady stream of positive information that can devalue any negative information from your past or simply build out a thin history. Here’s how to go about doing that.
- Open a Credit Card Account: A credit card is the most efficient and accessible credit building vehicle for the average consumer, as it will relay usage information to the major credit bureaus on a monthly basis.
- Get a Secured Card If Need Be: Should you find yourself unable to get a “normal” – or “unsecured” – credit card, your best bet is to open a secured card. Secured credit cards are typically easier to get because users are required to place a refundable security deposit (usually a minimum of $200) that will serve as their credit line and reduce risk for issuers. They report to the credit bureaus in the exact same manner as unsecured cards.
- Pay Your Bill On Time Every Month: Late payments will be noted on your credit files and will hurt your credit standing.
- Keep Your Credit Utilization Low: Maxing out your credit cards every month reflects negatively upon you, so it’s best to only use about 50% of your available credit.
- Lock Your Card In a Drawer If Necessary: You don’t need to actually use a credit card for it to benefit your credit standing. As long as your account is in good standing (and you pay for any purchases you make on time), the information being relayed to the credit bureaus every month will be positive.
- Maximize Your Available Credit: Raising your credit line is easy with a secured card; you simply add to your security deposit, and you can do so at any time. If you have an unsecured card, you can ask the issuer to increase your spending limit or look into opening another account (which will increase your aggregate available credit).
- Avoid Inquiries Before Your Credit Goes on Display: If you plan to apply for a job or take out a loan in the next six months or so, you might not want to apply for a new credit card. Every time you do so, your credit takes a slight dip for a few months.
So, take these tips to heart and develop a workout regimen for your credit standing. Pretty soon, you’ll have one less thing to worry about and a lot more money in your pockets.