In today's tough economy, consumers more than ever are paying attention to their credit.
Your credit score, for better or worse, is a numerical reflection of your ability to manage your finances.
Yes, it is true that while you may be very responsible and do all that is in your power to manage your finances successfully, bad times often hit us all and it is not necessarily our fault.
As the saying goes, "it is what it is" and at the end of the day, the responsibility to protect our credit falls on your shoulders.
It is hard to know what is what when it comes to managing your credit.
There are two items to monitor, your credit score and your credit report.
It isn't so much about keeping track of your score but more so about monitoring what is going on with your credit report.
The score simply reflects that quality of your report.
Here is a breakdown of your credit report: Bill-Paying History.
This is the most important part of your report and it states exactly what it sounds like, your ability to pay your bills on time.
Thirty-five percent of your FICO score is tied to your payment history.
Bottom line - pay on time! Outstanding Debts.
Of course having no outstanding consumer debts, such as an outstanding balance on your credit card is best, lenders do not expect this to be the norm.
Instead, they are looking for a modest utilization rate, which is your total outstanding debt divided by your total available credit.
If the answer is one, then you are maxed out and this is going to hurt your credit score.
Experts suggest a utilization rate below 30% to keep from hurting your credit score.
In other words, if your total combined credit limit is $10,000, you should have no more than $3,000 in outstanding unpaid balances.
Anything above that amount will start to negatively impact your credit score.
It is smart to perform this quick calculation on your collective debt balance but you also need to do it on an individual account basis.
So make sure you do not have a single credit card with a utilization ratio greater than 30%.
Credit History.
It is suggested that as much as 15% of your credit score is tied to the length of your credit history.
This is the reason why people are advised to start building credit early in life.
This is as simple as opening up a revolving line of credit and start making purchases and then paying off the balance.
A longstanding history of credit in your name is best, especially if you've been responsible with your payments.
Type of History.
Consumers have two options when seeking credit: Revolving Credit and Installment Loans.
A credit card is considered revolving credit while a car loan is an installment loan.
Having a mix of loan types on your credit report is helpful and will impact your credit score but certainly not so much that you should run out and open a new account just for the sake of building your credit.
Credit Applications.
Your credit score is impacted to a certain extent when you apply for more credit, whether it is a new account or a request to increase a line of credit on an existing account.
The general rule of thumb is to limit the number of credit applications during a 30 day period as much as possible.
Anything outside of 30 days will not have an impact on your credit score so be careful when applying to multiple offers at once.
As they say, "if you can't measure it, you can't manage it".
Keeping an eye on your credit report and the underlying score will help you effectively manage your financial well-being.
The best way to do this is to enroll in a credit monitoring service.
The small monthly fee required to do so is worth it in the long-run, especially if that's what helps ensure you keep the highest score possible.