3 Smart Ways to Improve Your Credit Health
Many people worry about their credit health only when they apply for a new lease or a new job. That's when they begin keeping their fingers crossed that their credit report looks good to whoever is viewing it.
Even though you're probably on top of your monthly bills and payments, you might wonder if there's anything else you should be doing to keep your credit report looking good or improve your credit history over time. It turns out there are three quick, smart steps you can take to help keep your credit healthy — even before your monthly statement rolls in.
#1: Calculate the credit you can afford
Looking for an easy way to calculate how much credit you can actually take on? Your debt-to-income ratio usually gives a clear picture of your financial well-being.
To calculate your debt-to-income ratio, first add up all of your monthly income, which includes your monthly gross pay (pay before tax deductions), Social Security, disability benefits, alimony, etc.
Then, add up all fixed monthly expenses such as mortgages, student loans, credit cards, car loans, and rent (but not utilities and telephone charges because they can vary on a monthly basis).
Finally, divide your monthly payments by your monthly income. Multiply the result by 100, and that's your debt-ratio percentage.
Because this ratio gives lenders an indication of how much additional credit you can handle, a low ratio may mean a better chance of not being denied credit or paying a higher interest on loans.
#2: Choose the right credit card
Some people manage their spending with different credit cards: one for household expenses, for example, and one for big-ticket items that they'll pay off over time.
If you're thinking about getting another credit card, ask yourself these questions to help choose the right card. It all comes down to how you plan to use the card — and which benefits are most important to you.
- Does it offer the best rate? Is there an annual fee?
- Does it meet my spending needs?
- Is it the right type of card for me?
- Am I getting something back for spending on the card, such as cash back or rewards?
- Is the card widely accepted?
- What features, services and security options are available?
- Does it have tools to help me manage my spending, like email/text message alerts, automatic bill payment, due date options, etc.?
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#3: Get smarter about payments
There's a wealth of information on this topic, but it really boils down to two basics:
- First, developing a regular payment pattern is essential. Information about how we pay our bills is sent to credit bureaus — and companies can review whether we pay our bills on time each month. Some people mistakenly think it's better to save up for a few months and then pay off the balance in full. But for every month they don't send in at least the minimum payment due, a bad mark appears on their credit report, even if they pay their balance in full the next month.
- Secondly, it's a good idea to minimize interest charges by paying off your balance as soon as possible. You may be able to pay double or even triple the minimum payment due to pay off your balance faster — which may save you a lot in interest charges.