12 Ways to Build and Maintain Excellent Credit in 2013 and Beyond

If you are in the market for a big ticket purchase – such as a house or a car – you know how a bad credit rating can either stop you in your tracks or cost you more in the way of higher interest rates or other unfavorable loan terms.  Your credit profile can determine interest rates and maximum limits of your credit cards and car, home, student or business loans.   Resolve to manage your financial life so that you can achieve excellent credit –  you’ll see big financial gains come next year.

Start the year off right with these 12 quick and simple tips and you’ll be well on your way to excellent credit:

1. Don’t let your library fines, parking tickets or medical bills fall through the cracks. You may think that ignoring that parking ticket, unpaid copay, or library fine is no big deal, but let it linger and your credit score could suffer. Libraries, hospitals or state jurisdictions aren’t financial agencies, but they may still turn your unpaid bills over to a collections agency. Once a collection agency is responsible for your unpaid fee, ticket or bill, they’ll report it to the credit bureaus, A.S.A.P.

2. Don’t close your oldest credit card account. You may think that the quickest way to a stellar credit score is having no debt. Not so fast. A long, positive credit history signals that you’re reliable when it comes to paying your credit cards and loans. If you pay off an old credit card, keep it open! Closing the account may decrease the length of your credit history, while increasing your credit utilization ratio (how much you owe versus how much available credit you have)—a double whammy to your credit score.

3. Use your credit cards every few months. Some credit card companies will close credit card accounts due to long-term inactivity. If your credit card is closed it can hurt your credit utilization ratio, because that line of credit is no longer available to you, lowering credit score. Instead, put a small purchase on it every few months and pay it off in full.

4. Don’t make major purchases just before your statement closes. If you put a major purchase on your credit card just before your statement closes, it makes your credit utilization appear higher and can hurt your credit score. Instead, wait to make that major purchase after your statement closes and pay it off in full before the billing cycle closes.

5. Don’t settle your debts if you can pay them off. If you’ve had some tough financial times lately, you may be tempted to stop paying your bills so you can settle with a creditor for less than you owe. Don’t. In additional to the late fees and penalties you’ll incur, the settlement will stay on your credit report for seven years. Call your creditor and work out a payment plan. See if they’ll waive the interest or lower the payments until you get back on your feet.

6. Avoid “hard” credit checks. You may not realize everything that can cause a hard inquiry. If you rent a car using your debit card, for example, some companies’ contracts allow them to pull a credit report—a hard credit inquiry. Other things that can cause a hard credit check? Opening up a new cell phone plan, requesting a credit limit increase, applying for a loan or moving money from one banking institution to another.

7. Don’t open several new accounts at once. Each new account will cause a hard inquiry on your credit profile and can lower the average length of your accounts. The length of your credit history accounts for  15 percent of your credit score. Lenders may also see this as a red flag if it appears that you’re desperate for credit.

8. Know what retail credit cards can do for you. If you’re trying to build credit, consider a retail credit card. Typically, they’re easier to qualify for than a normal credit card but are prone to high interest rates and fees.  Pay the card off in full each month and only charge small amounts to the card.

9. Monitor your credit. Most of us only think about our credit when we’re applying for a loan or credit card or moving apartments, but it’s important to know what’s happening with your credit profile. Several sites offer free monitoring services that will automatically send you alerts when new accounts or information shows up on your credit report. You’ll be better to able to identify potential identity theft or errors on your report, which can cause your credit score to tank.

10. It never hurts to ask. It may surprise you how willing banks or credit card companies may be to work with you. If you typically have on-time payments, but slip just once, you may ask your lender for a ‘good-will deletion.’ Be persistent and the lender may actually expunge the delinquency. The result could make a big difference to your credit score!

11.  Pay your bills on time!  It seems intuitive, but your credit score is most negatively affected when you are late on payments.    Setup automatic payments for the minimum payment so that you won’t be late – then pay the balance down whenever you can.

12.  Keep your credit card balances to less than 50% of the authorized limit.  Creditors think you may be overextended if all your credit cards are at the limit and it will negatively affect your credit rating.  Keep balances under 50% of the authorized credit limit whenever possible. Thinking of co-signing for anyone other than a spouse?    Think VERY HARD before you sign on the dotted line, because you will be on the hook for that loan if the loan goes in default. If your credit is hopelessly damaged, contact me for suggestions.  I work with a law firm that has done an excellent job in cleaning up client credit files, and this IS NOT a debt consolidation company.

Article reprinted in part from H&R Block.com