ELFI Credit Series: Don’t Just Build Good Credit — Maintain ItDecember 17, 2019
If you’re a health nut, you know the importance of clean eating, regular exercise and routine check-ups. You don’t just “get healthy” once and move on — health is a lifestyle that requires constant maintenance.
Your finances are no different.
“Just like you go for your annual physicals for your health, you should be doing the same thing with respect to your financial health,” says Barbara Thomas, executive vice president of Education Loan Finance (ELFI).
Whether you’re gearing up for the new year by setting financial (and maybe health-related) resolutions or working toward a specific life goal (buying a house, paying off student debt, etc.), you need to maintain good credit. Here’s why and how to do it.
Why maintenance matters
Your credit score is like your weight (except with credit, higher numbers are better). Both are snapshots of your financial or physical health at a single point in time, and they can fluctuate up or down depending on your behavior.
In other words, just because you have good credit now doesn’t mean you’ll have it forever. It takes effort to maintain good credit, but the work is worth it. You need good credit throughout your life in order to:
- Get a mortgage.
- Refinance student loans (to potentially save thousands of dollars).
- Get auto and personal loans at low rates.
- Get credit cards with rewards and perks.
- Get favorable insurance prices.
- Co-sign student loans for your kids, if necessary.
But just like weight isn’t the only factor that contributes to physical health, your credit score is only part of the equation when you’re applying for loans. Lenders also review your credit report, which details the credit lines you’ve opened and closed, the amount you owe each creditor, and your payment track record. Finally, they often calculate your debt-to-income ratio to see if you have enough extra cash on hand to make another monthly payment.
How to maintain good credit
Whereas diet, exercise and sleep is the trifecta when it comes to staying physically healthy, there are five factors that go into maintaining good credit health: Payment habits, credit utilization, credit age, credit mix and new credit inquiries.
Mastering each category is key to maintaining good credit, although some factors matter more than others.
- Pay your bills on time — always: Payment history accounts for the largest portion (35%) of your FICO score, which is the most popular credit scoring model. To succeed in this category, don’t miss payments or pay late.
- Don’t max out your credit limit (or even come close):Credit utilization, or the percentage of total available credit you use, makes up 30% of your FICO score. Lenders want to see that you’re not overextended, so keep your total charges to less than 30% of your limit on each credit card. If a card’s credit limit is $10,000, for example, don’t spend more than $3,000 before paying it down first.
- Think twice before closing credit cards. The age of your credit history accounts for 15% of your FICO score, and older is better. Closing credit cards — especially old ones — lowers your average account age. If a card doesn’t have an annual fee, consider keeping it open and putting one small, recurring purchase on it, like Netflix.
- Use both credit cards and loans: Credit mix accounts for 10% of your score. It’s not necessary (or smart) to open accounts just to satisfy this aspect of your score. But having both credit cards and installment loans (like a student loan or car loan) proves that you can manage different types of debt responsibility — assuming you consistently make payments on time.
- Limit hard inquiries: New credit counts for 10% of your score. When you apply for new credit (either a loan or credit card), lenders have to do a hard inquiry on your credit to see if you qualify. Multiple hard inquiries are a bad look for your credit, so avoid applying for multiple cards or loans in a short timeframe. Some lenders, like Education Loan Finance, let you prequalify for products like student loan refinancing with no hard inquiry, which means no ding to your credit.
Habits for good credit hygiene
Just as disease and injury pose unexpected threats to your physical health, errors and fraud can endanger your credit. To protect yourself, adopt these habits:
- Check your credit reports annually:You can pull three credit reports for free each year — one from each of the three major credit bureaus (Transunion, Experian and Equifax). Read them thoroughly for mistakes. If you spot one, dispute it with the credit bureau. Also, notice how the same information may be characterized differently by different bureaus. Read the comments below each account listed on your reports, and dispute the information if it’s inaccurate.
- Keep your credit frozen: You can freeze your credit for free through each of the credit bureaus. A freeze means no one can pull your credit, which helps prevent scammers from opening accounts in your name. When you wanta lender to pull your credit because you’re applying for a loan or credit card, you can temporarily unfreeze it.
- Consider a credit monitoring service: You can check your own credit reports annually for free. But to keep extra eyes on your credit, consider a credit monitoring service. You’ll be offered free credit monitoring if you’ve been a victim of a data breach. Otherwise, you can purchase it from one of the credit bureaus for a monthly fee, or sign up for a free credit monitoring services from sites like Credit Karma and Credit Sesame.
» MORE: 5 Habits for Good Credit Hygiene
Once you’ve followed these tips, rinse and repeat. It can take as little as several months to establish credit in early adulthood, but maintaining credit is a lifelong endeavor.
Credit-worthiness is an important factor in maintaining good financial health. And if you’re considering student loan refinancing, your credit score plays an important role in securing great rates. ELFI’s prequalification process is quick, 100% online and won’t affect your credit*. Speak with one of our Personal Loan Advisors today, or see how much you could save today.*
*Subject to credit approval. Terms and conditions apply.