There are some fundamental topics to discuss that could help increase your credit intelligence. Here are four ways to get smart about credit:
1. Get familiar with your credit reports
Your credit report is a snapshot of your recent credit activity.
To get started, request a free copy of your credit reports at annualcreditreport.com. You’re eligible according to federal law to receive a free report from all three nationwide consumer credit reporting companies (Equifax, Experian and TransUnion) every 12 months if requested.1
For detailed information on how to read each report, research one of the following articles:
- How to read your Equifax credit report
- Understanding your Experian credit report
- Transunion: How to read your credit report
2. Understand what can impact your credit score
Reporting agencies use credit factors to create a score from your credit activity.
To give you an idea of what can impact your score, some common credit factors include:
- Payment history — If you have a history of paying your bills on time, it could positively affect your score.
- Credit utilization rate — This calculation is a percentage of your total credit limit vs. the total of all your balances. Most financial experts suggest a rate below 30-40% to positively influence your credit score.2
- Length of credit history — The length of your credit history represents how long you’ve been in the credit system. The longer your positive credit history, the better it can be for your score.3
- Credit mix — The different types of credit you use, or credit mix, may also impact your score. The more types of accounts you have in good standing, the better it could reflect on your credit score.4
- Hard inquiries — When you apply for a new line of credit, some lenders might ask to review your credit report. If they do, you could receive a hard inquiry. A high volume of hard credit inquiries can negatively impact your credit score. However, the impact of credit inquiries does fade over time and completely drop off your report after approximately two years.5
3. Talk to your creditors
Financial troubles can happen to anyone. If you suddenly find yourself unable to keep up with your credit payments, contact your creditors right away. Not only will some creditors be willing to work with you, you might be able to agree on a new arrangement that benefits both of you.
Here are some tips to effectively communicate with a creditor:
- Clearly explain your issue — Whether you’ve lost your job, suffered a death in the family or have unexpected medical bills, be clear about your circumstances.
- Propose a solution — Create a solution to propose at the end of your initial explanation. By doing so, you can show the creditor that you’ve put serious thought into the new arrangement.
- Ask questions — As you get close to reaching an agreement, ask questions if you feel unsure about any of the details.
- Get any new arrangements in writing — If you settle on new arrangements, request a copy in writing. This way, you’ll have a physical copy for your records.
4. Create a plan to improve your credit score
There is no “one plan fits all” when it comes to improving your credit score. However, in order to start trending in the right direction, you need to create a plan to guide the way.
Here are some tips to improve your credit score that may help you create a personalized plan:
- Pay all monthly bills on time — If you could use a few tips in this area, check out these four tips to help pay your monthly bills on time.
- Identify and change bad habits — For tips on how to break certain patterns of bad behavior, here are three credit habits to consider changing.
- Educate yourself on credit common terms — To help you get more familiar with credit lingo, here are 10 common credit terms defined.
- Talk to family or friends with good personal finances — If you know someone with no credit card debt, ask if they’re willing to share some tips.
Although “Get Smart About Credit Day” occurs only once a year, the knowledge you obtain can be applied every day.
1. Central Source LLC. “All About Credit Reports. Annualcreditreport.com. https://www.annualcreditreport.com/yourRights.action (accessed on September 24, 2019).
2. Investopedia. “What is a good credit utilization ratio?” Investopedia.com. https://www.investopedia.com/ask/answers/040715/how-does-your-checking-account-affect-your-credit-score.asp (accessed on September 24, 2019).
3. O’Shea, Bev. “Credit Age: How Length of Credit History Affects Your Score.” Nerdwallet.com. https://www.nerdwallet.com/blog/finance/credit-age-length-of-credit-history/(accessed on September 24, 2019).
4. Detweiler, Gerri. “Tips for Improving Your Credit: The Types of Accounts in Your Credit Report.” Credit.com. https://www.credit.com/credit-reports/tips-for-improving-your-credit-types-of-accounts/ (accessed on September 24, 2019).
5. Experian. “What Affects Your Credit Scores?” Experian.com. https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/ (accessed on September 24, 2019).
This article has been updated from its original posting on October 17, 2017.