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If you aim to truly make money, there’s often a significant obstacle in your path: your credit score. A poor credit score can impact numerous facets of life, from securing loans for a car or investment property to obtaining credit for business ventures.
Understanding and improving your credit score is crucial for financial stability and growth.
A bad credit score can lead to various complications, such as being denied for business or personal loans, having rental applications rejected, facing challenges during employment background checks, and dealing with higher insurance premiums.
These are hurdles you want to avoid, and you can do so by focusing on improving your credit.
The Importance of a Good Credit Score
In my view, understanding credit and debt management is more valuable than any academic degree. Here’s a breakdown of how your credit score is determined:
- Payment History (35%): This includes whether you pay your bills on time or have had late or missed payments.
- Credit Utilization (30%): This refers to how much credit you have available versus how much you are using.
- Length of Credit History (15%): This is how long you have been using credit.
- Credit Mix (10%): This involves the types of credit you have, such as credit cards, mortgages, and personal loans.
- Recent Credit Inquiries (10%): These are the new credit accounts you’ve opened or applied for.
Having a strong credit score enabled me to secure millions of Rands in real estate over four years, despite initially being unable to qualify for a simple cell phone contract. If you want to know how, here are some tips to focus on:
Tips to Improve Your Credit Score
1. Check Your Credit Score
Understanding your current credit score and identifying any errors is vital. Dispute any inaccurate information as it can negatively impact your score. Having a clear overview of your credit status is essential.
2. Pay Bills on Time
Never make late payments. This is the easiest and most effective way to improve and maintain a good credit score, accounting for 35% of your score.
3. Pay Off Debt
Paying off debt is crucial and makes up 30% of your credit score. Always pay more than the minimum payment to reduce interest and overall debt. Consider using the Avalanche or Snowball method to prioritize your debt repayment.
4. Avoid New Hard Inquiries
When aiming to increase your score, delay applying for new credit. Hard inquiries, which occur when a lender checks your credit, can affect your score and account for 10% of it.
5. Maintain Good Credit Habits
Once you’ve improved your score, keep up the momentum. Pay bills on time, maintain low balances on credit cards, and apply for new credit only when necessary. Keep old accounts open to maintain a long credit history, which accounts for 15% of your score.
6. Diversify Your Credit Mix
Having a range of credit types, which makes up 10% of your score, can be beneficial. If you haven’t had a credit card before, consider applying for a secured credit card. Making small charges and paying them off each month can help build your credit.
Final Tip: Use Credit Cards Wisely
Using a credit card for everyday purchases can help build your credit score, provided you pay off the balance promptly. This demonstrates financial discipline to lenders and credit bureaus, showing you can manage debt responsibly.
By implementing these steps, you can start improving your credit score immediately. Research these topics further if needed, and remember that taking action is essential for financial success.
