Just as you should visit your doctor every year for an annual physical, you should also keep an eye on the health of your credit. This will be especially important if you plan on buying a house in the next year or two.
First, check your report. Some people believe this actually hurts your credit but that's not true. Checking your credit can actually improve your credit score because you may find some inaccurate information that is lowering your credit score.
Many credit cards offer a free credit score tracker as part of your on-line account. You can also use services such as Credit Karma or Credit Sesame. While the scores that these services offer are estimates, they are indicative of what the credit bureaus are reporting to potential creditors.
Second, know how to improve your score. Of course, paying bills on time is the primary way to maintain or raise your credit score, but there are other factors in your score.
- The average age of your credit is important. Having a long history raises your score. Even if you haven't used that JC Penny card in years, don't close that account. In fact, you may want to make a small purchase on that card to be sure the credit company doesn't close your account due to inactivity. The cards you've had the longest are the most important ones because they bring up the average age of your credit file.
- Don't apply for new credit unless absolutely necessary. Every time you apply for credit, the company makes an inquiry into your report and that shows up on your report. Someone that has many inquiries makes it look like they are continually looking for credit and that lowers your score. If you must apply for credit, ask that they do a "soft pull." They still get almost all of the same information, but it doesn't show up on your credit report. If they ultimately approve you, they will place a hard pull (one that will show up) on your credit so again, only apply if necessary. If you're planning on buying a house soon, that "instant" credit at Best Buy could hurt your chances.
- Some people believe having high credit limits is a bad thing. This is not true. Having high balances is a bad thing! High credit limits with low or no balances show that you can be trusted with credit. During a mortgage process, you may be asked to lower your limits or cancel a few cards, but only do this if you're asked to do so. If you're asked to cancel cards, cancel the newest ones first to keep the average age of your credit higher.
- Watch your balances. Banks need to see that you are using credit wisely. This means keeping balances under 30% of your available credit. If you carry any balances, pay them down as quickly as possible.
- Use credit. Not using credit leaves you with no history to prove that you can be responsible with credit. Even if you like to pay cash for everything, use a credit card at least once a month, then pay it in full when the bill comes in. Having this activity will raise your credit score.
Third, maintain a safety reserve. Having a reserve will allow you to handle an emergency without adding debt to your credit report. Reserves are also a factor when you apply for a mortgage so the more you can keep in reserve, the better.
Forth, if there is anything on your report you do not recognize, dispute it immediately.
Fifth, don't make any large purchases before buying a house. The less you owe on other debt, the more likely you'll be approved for your mortgage.
Finally, if you need a boost to your credit score, ask a close friend or family member to add you to a credit card account with a high credit line with no balance. Don't have them add you as a co-borrower, just as an additional card. They can cut up the card and throw it away as soon as it comes in, but that account will also show up on your credit report making it appear that you have one card with a large credit line and no balance.
If you keep an eye on your credit health, you can ensure you will have the credit needed to buy that house!