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David K. Hovis

Financial Foundations - Establishing a Good Credit Score

Developing good credit habits can have far-reaching implications, the most important of which is attaining a good credit score.  The significance of a good credit score is often not understood until someone tries to apply for a mortgage or other loan.  Then, the relevance of what that number means is evident.  The better the credit score, the better the interest rate.  On the flip side, the lower the score, the harder it is for a loan to be approved or the higher the interest you will pay. 

What this number signifies is your level of responsibility with repayments and debt.  Here are some ways your credit score can be negatively impacted:

  1. Late payments.
  2. Multiple credit cards with high utilization.  Utilization is calculated as the percentage of your available credit limit that you have charged to your card.  Above 30% is considered high utilization.  For a card with a $10,000 limit, high utilization is having a balance more than $3,000 per month.
  3. Excessive credit card debt, especially when this debt can’t be paid off monthly.

The good news is there are several ways to raise your credit score.

  1. Make payments on time.
  2. Pay at least the minimum. 
  3. Keep credit card utilization below 30% of the available credit limit.
  4. Request for higher credit limits.  This seems counterintuitive, but having a higher limit, as long as you are not using the extra available credit on the card, will lower your utilization, and therefore improve your credit score.  You can request higher limits when your income increases, or you establish a good payment history.
  5. Keep credit card accounts open, even if you no longer use the cards.  Closing accounts actually reduces your credit score.
  6. Avoid applying for multiple credit accounts close together.  Applications cause a small, temporary drop in your score.

 

For more tips on creating a good financial foundation, follow Hovis & Associates on social media or on our website and read our monthly blogs.

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Check the background of this financial professional on FINRA's BrokerCheck