Credit Management: Expertly Manage (And Improve) Your Credit With These 7 Tips
In modern life, credit is all-important. From being able to attend college, purchasing a car to get to work, or taking out a mortgage on your first home, credit is what enables us to acquire something before we have the funds to cover it. Credit, when used properly, can be a great tool to help make progress in your life. Alternatively, poorly managed credit can create roadblocks and hinder growth.
That’s why good credit management is a stellar life skill. The better you are at managing your credit, the more credit, on better terms, you’ll be offered later down the line.
If you’re only just starting to think about managing credit then this Grow Credit article is for you. We’ll be covering:
What is credit?
What is credit management?
7 simple credit management tips
Let’s jump straight to it!
What is credit?
The word credit can mean a couple of different things in the financial world. In this instance, we’re mostly talking about credit as the money that’s borrowed by you as part of an arrangement with a lender. The most common type of arrangement comes in the form of credit cards. Credit is used on the card to immediately pay for the purchase. This could be items of clothing, a swanky new laptop, or a car. It’s an expectation that this credit is paid back, usually with interest, in a reasonable amount of time.
There are other sources of credit, such as payday loan companies, peer-to-peer lenders, credit unions, and banks. Thinking about credit in this broader sense, and being able to successfully manage this credit means you’ll potentially end up with good credit. This means improved creditworthiness in the eyes of lenders like banks and credit card companies. It’s this management; how you use your loaned credit, that directly impacts your credit score, credit reports, and overall credit history.
What is credit management?
In layman’s terms, credit management is the act of, well, managing your credit. It’s about making proactive and successful moves to ensure you’re using your credit well.
By doing this, you’re able to boost what is called your credit score. Upping your credit score enables you to move to a better credit score band, as I will explain.
The Fair, Isaac, and Company (FICO) corporation created a system that determines the creditworthiness of a given borrower by assigning you a FICO credit score. This creditworthiness is detailed as a score band. There are five FICO credit score bands, namely “poor,” “fair,” “good,” “very good,” and “excellent.” As you can probably guess, the closer to “excellent” you are, the better rewards and opportunities credit lenders will offer you. This means having more impressive credit cards with lower interest rates and getting the mortgage you want.
With effective credit management, you’ll achieve a higher FICO credit score. With this, you can enjoy greater available credit giving you a more flexible lifestyle with added opportunities. All this from simply having “good credit”.
Credit management isn’t a one-off thing. It needs to be done over an extended period. Without continual review and improvement, your credit score and limit will stop increasing and may even decrease.
7 simple credit management tips
It’s here we get to the nitty-gritty of this article, where we tell you exactly how you can manage your credit score. Here are 7 top tips that will keep your credit scores healthy. These tips are as follows:
Use credit often, but as little as possible
Utilize less than 30% of your available credit in a month
Always pay back borrowed credit on time
Avoid too many credit applications in a short space of time
Monitor your credit statements each month
Dispute any errors on your credit reports
Consider a debt consolidation loan
Let’s explore these in more detail.
Tip #1: Use credit often but as little as possible
Tip #1 comes across as an oxymoron. What do we mean by use credit often but as little as possible?
Well, you want to keep your credit accounts active, which means using them regularly. Do this by spending a small amount that you can pay off each month.
Inactive credit accounts will result in account closure. Once more, credit lenders are not required to notify customers of this closure when it’s due to inactivity. No credit account means no credit rating.
There are five components used to determine your FICO credit score, and in this instance, we’ll focus on two, namely: Credit history length and your utilization rate.
Your credit history length is a factor that makes up 15% of your overall FICO score. It’s calculated in two ways - both by the age of your oldest account and by the cumulative age of all your accounts. The age of a closed credit account is determined by how long the account was open.
Utilization accounts for 30% of your FICO score. Having a utilization rate of 0 means there is insufficient data to determine your lending risk. Carrying even a small balance, say as little as 1% of your limit, will improve your utilization rate and overall credit score.
Thinking about credit utilization rates brings us to our next credit management tip.
Tip #2: Utilize less than 30% of your available credit a month
Tip #2 is about keeping an eye on your credit utilization ratio - a ratio that determines how much available credit you’ve used. Best advice states you should use 30% of your overall credit limit.
Use this 30% limit as your real limit. Exceeding this level will harm your credit score. For instance, looking at consumers with an excellent FICO score, we find they use, on average, 7% of their available credit.
“Consumers with FICO scores of 800* use, on average, 7% of their available credit” - Can Arkali, principle scientist for FICO
*FICO score of 800 equates to excellent.
Keep your credit utilization ratio low by using your credit account to make small purchases - for gas, groceries, personal items, or to manage subscriptions. It’s easier to pay off these small purchases in good time.
To keep track of your credit utilization ratio, you can set up alerts from your credit issuers and also ask for regular reports detailing how much credit you use.
Tip #3: Always pay back borrowed credit on time
This is a big one - paying your bills on time every month is a crucial element for successful credit management.
FICO puts the most importance on timely payments to determine your credit score. A payment that is 30 days late can cause a swingeing drop in your credit score and could lead to you being refused your next loan application. This is something no one wants.
It’s generally recommended you pay your credit balance in full every month. Clearing your credit accounts with each billing cycle means you’ll never get charged interest, you’ll never miss a payment and you’ll be deemed a safe borrower to lend money to. Set up automatic payments for your bills, or a reminder to pay several days before your due date, to give you time to transfer funds to creditors.
Tip #4: Avoid too many credit applications in a short space of time
A key part of credit management is keeping your credit applications in check.
Your credit applications will leave a footprint on your credit report. If you send too many applications in a short space of time, and if these applications are for large amounts of credit, this indicates to the lender that:
You’re having difficulties with your credit applications.
You’re in a poor financial situation and hence a risky borrower with a low credit score.
When you add a new credit account in this scenario, it can cause your credit score to drop - first when the creditor inquires show up on your credit report, and then when your credit account is opened.
You want to space out the number of credit applications you make to prevent this from happening.
Tip #5: Monitor your credit account statements each month
Continuous credit account monitoring will help you better understand your credit history. Your credit history is a record of how you’ve managed your credit accounts. This may include both your current and past credit accounts, information on your payment history, and the total amount you owe.
Credit lenders use your credit history to gauge money lending risk. If you have a lot of outstanding payments and a low credit score, then you’ll receive poorer loan terms including interest rates. Because of this, you must regularly check your credit account reports and ensure the information is accurate and complete.
Checking your credit account statements also allows you to highlight spending behaviors that are harming your credit score. Maybe you’ve been making regular big payments using a particular credit account. Having a monthly overview of your credit history allows you to pick up on your credit spending habits, to better understand what you can do to improve your credit score.
You can monitor your credit account statements online using monthly statements. Sometimes the information gives a projection of how long it will take to pay off your credit card bill if you paid only the monthly minimum due.
Tip #6: Dispute any errors on your credit reports
Monitoring your credit statements allows you to spot errors and keep on top of fraudsters. Fraudulent activity and technical errors can negatively impact your credit score. You could be the victim of fraud and also penalized for being inattentive.
Look out for your creditor incorrectly displaying the amount of money in your account, and whether someone has used your credit account without your knowledge.
On the latter note, fraudulent activity rose during the Coronavirus pandemic with economic anxiety high. Crooks were impersonating banks and lenders, offering bogus help with bills, credit card debt, and student loan repayments. It’s ever more important to spot this fraudulent activity and stop it.
Keep your financial records in order as these are evidence.
Once your creditors agree with the error, it could take up to one month for these updates to go to a credit reference agency. On review, the credit reference agencies can make the relevant changes needed. You should then check your credit report with the other credit reference agencies to ensure the same error isn’t repeated.
Unfortunately, most of the leg work here falls on you. But it’s vital to dispute mistakes, otherwise, they can seriously harm your credit score.
Tip #7: Consider a debt consolidation loan
A debt consolidation loan is a loan used to combine your existing debts into one pot. All you need to do is apply for a loan for the amount you owe in existing debt, and if approved, use those funds to pay off your other borrowings. You’ll then pay back this loan over time, usually in monthly payments.
Debt consolidation loans are great if you have multiple credit accounts with high-interest payments. With this one loan, you can experience lower interest rates, shortening the time until credit repayment. This will improve your payment history - if you make payments on time - which, as we know, is a big factor impacting your credit score.
Once more, a debt consolidation loan can lower the credit utilization ratio. This is because, when you open a debt consolidation loan, your available credit will increase.
Yet, consolidation loans should only be used when needed. Contradictory to what has been said, in certain circumstances, consolidation loans can lower your credit score by:
Acting as a new credit application, which - as previously stated - lowers your credit score.
Presenting new risk. Consolidation loans are new credit, which is deemed as a new risk by lenders.
Lowering your average credit age, with old accounts closed to create new accounts.
In conclusion, when it comes to consolidation loans, take the philosophy of only open a consolidation loan account if needed. Whether they improve your credit score is dependent on your unique circumstance, but they are definitely worth considering. Don’t feel tempted to close your credit accounts, you need these to boost your credit score as explained in the previous tips. But make sure to use them in small increments and pay these credit accounts off each month - you don’t want to be in a situation where you need another consolidation loan in the future.
This brings us to the end of our 7 top tips for effective credit management. Yet our advice doesn’t stop here. We have one more trick up our sleeve you can use to boost your credit score. That is, by using a Grow Credit account.
No matter whether you already have credit, or don’t yet qualify, Grow Credit helps everybody build and improve their FICO credit score.
Here’s how Grow Credit works in more detail.
Build your credit easily with Grow Credit
Grow Credit helps U.S residents easily build and maintain their credit scores. Simply apply for Grow Credit’s free and virtual Grow Credit Mastercard to pay off small-scale subscription bills for Netflix, Spotify, Disney+, and much more.
By paying back the money that’s advanced from your Grow Credit Mastercard in good time, your credit score will rise.
Think about your Grow Credit account as a small amount of credit borrowed to be easily paid back in good time. This means a good credit utilization ratio and timely payments to boost your credit score. Grow Credit is key for better credit management.
Apply for a Grow Credit Mastercard, which takes just a few minutes using our iOS app, Android app, and website. To get started, all you need to do is meet the following criteria:
A bank account (that’s been open for at least 60 days)
A valid email address
A working phone number
A social security number
A physical U.S. address and resident status
A minimum income of $1,200 per month (for at least two months)
An account balance of at least $100
And to be age 18+
Do you meet these requirements? Then what are you waiting for, apply for your Grow Credit account and get started today!