Whether we’re in a pandemic, or just going about our lives normally, financial management is a major part of everyday life. Our financial circumstances determine our lifestyle, and many of our day-to-day choices. The importance of properly handling our finances cannot be overstated, and one of the best ways to help prepare for your financial future, especially during the pandemic, is to understand credit, how it works, and what you should and should not do to improve it.
Understanding Credit
Remember that how you utilize credit will determine how you can use it to your advantage in the future. The more you keep up with payments today, pay off your credit balances each month, and keep your debt relatively low, the better off you’ll be when trying to borrow in the future.
Your credit history, put simply, is a record of how you’ve treated the debt you’ve incurred. Financial institutions, such as banks or credit unions, report how well you’ve paid off any money they’ve let you borrow. For example, if I were to take out a loan for $1,000 and promised to pay it off over the course of 3 years, I would be expected to pay monthly payments until I’ve paid off the full balance, plus interest. If I were to miss a month, I could end up paying fees, which would make the loan more expensive on top of the interest I’d already pay. In such a case, the lender could also report my late or missed payment to the credit bureaus if it weren’t addressed in a timely manner.
The credit bureaus mark late payments on your credit reports once they’ve been reported, which is typically after they’re at least 30 days late, and those marks will stay there for about 7 years. These marks can severely damage your credit scores, which indicate how risky you are as a borrower.
On the other hand, the more on-time payments you make, and the more debt you pay off, the higher your credit scores will typically be. And your effort won’t go unnoticed — with higher credit scores, you’ll generally be able to secure better loan terms and get approved for higher-quality credit cards, making your finances that much easier to manage.
Boosting Your Credit Scores
By now, the importance of understanding how to manage and improve your credit — especially during the pandemic — has likely become clear.
The good news is that responsible credit management is fairly easy. There are a few basic points to remember:
- Always pay off your credit card balances in full each month, and NEVER miss monthly payments on loans. This will have the biggest influence on your credit, so pay extra attention to making on-time payments. Though it goes without saying, don’t take on more debt than you can afford. Remember that credit cards and loans are not free money. They may make your finances a bit more relaxed in the moment, but they can cost a lot of money in the long run, especially if you poorly manage that debt.
- Don’t apply for too many credit cards or loans at once. Every time you apply, it gets logged on your credit reports, and may ding your credit scores. Credit lenders don’t like to see that you’ve submitted a lot of applications in a short time because it looks like you may be scrambling for extra money that you don’t have.
- Keep your credit utilization low. When you get a credit card, you have a limit to how much debt you can carry at any one time. Keep your spending on the lower end of your limit (if you’re paying off your balances in full this should be no trouble), and you will look much better to lenders.
- Keep your accounts open for a while. Closing accounts may seem smart if you’re not using them, but credit scoring models see that as a bad thing. Your average account age directly impacts your credit scores, so you’re typically best-off keeping accounts open unless you’re paying an annual fee for a card that’s of no value to you.
- Have a mix of different credit accounts, such as credit cards and loans. The more diverse your credit history, the better.
Use Your Credit Wisely
Though this is just a basic overview, following these tips should allow you to reliably build your credit, as long as you stick to your guns.
Just remember that if you’re in a financial pickle and you absolutely must use credit as a crutch, and can’t pay off your balances in full, make sure you can afford the payments. If you use credit and miss payments, you can end up paying a lot more money and hurt your financial future. Contact your lender and discuss your options if you’ve reached this point; most banks and credit card issuers provide financial hardship programs for struggling customers, which could prove invaluable when times are tough.