Credit ratings aren’t awarded; they’re earned. A credit score, or credit rating, determines whether you qualify for a loan, credit card or service, and often, the terms of that loan are based on your credit rating. Lenders use that number to estimate your ability to repay the debt. Maintaining a solid credit rating requires making regular payments, communicating with your creditors and checking your credit report annually.
Credit ratings aren’t based only on your credit card use, but also on your payment history with car loans, mortgages and even medical bills. But credit card usage and payments are most often associated with a credit rating.
Carrying too many credit cards, even if you don’t use them frequently, can damage your credit rating. It’s not always easy to turn down the almost-daily invitations you receive in the mail–low-interest rate cards, free gifts, no-transfer fees–but try.
As for the cards you already have, work to lower your credit card debt by making more than the minimum monthly payment. The interest on a $1,000 purchase, for example, takes more than seven years to pay off if you make only the minimum payment. That amounts to an additional $800 in interest. If possible, pay the entire balance each month.
You can also get your credit card usage under control by using them only in emergencies, as swiping a credit card is the equivalent of taking out a loan every time you use it. Besides credit cards, pay attention to monthly bills. Whether you use automatic draft or a detailed calendar, bills should be paid on time to avoid negative marks on your credit rating.
If you have loans, pay them first each month, avoiding unnecessary expenses like dining out. You’ll see the loan amounts decrease more quickly and your credit rating will remain intact.
A debt doesn’t disappear because the creditor has stopped sending notices.The reality is the bill may have been turned over to a collection agency. And once that’s happened, the bad debt will find its way to your credit report. Your best bet in avoiding damage to your credit rating is to call the collector and try to work something out instead of ignoring the phone or the mail. Communication and a good faith effort may prevent a charge-off, or negative mark, on your credit report.
Check Your Credit & Take Action
Be diligent about checking your credit rating. Check your credit report at least once each year. The Public Interest Research Group (PIRG) claims that one out of every four credit reports contains errors. Your first order of business should be to get those negative marks off your report. Consumers are allowed by law to obtain a free credit report each year–one from each of the three major credit reporting agencies: TransUnion, Experian and Equifax. To download a copy of your report, visit www.annualcreditreport.com. Or you can call (877) 322-8228 to request a copy to be sent via mail. The three agencies might not all contain the same information. Therefore, consumers should check a different agency every four months to confirm that errors are being corrected and that new problems aren’t surfacing.