Effective debt management is vital to achieving and maintaining a top credit score which is used by major loan companies and some employers and even landlords for determining how responsible you are when it comes to debt repayment. Having a good credit score will get you the best rates of interest and terms on home mortgage loans and auto loans as well as insurance plans, job positions, rentals and other items of importance.
Bad debt management is one of the leading causes of bad credit scores. Mismanaging your debt will rapidly erode your good standing with most lenders and can even effect future job positions, security clearances and apartment rentals. Therefore, it is imperative that you build good credit, repair damaged credit and then do regular credit rating checks to ensure that it remains in good standing.
What Is Your Credit Score?
In order to protect your credit score, you should first learn what it is, who uses it and how it is calculated.
Unlike your credit report that is permanently recorded and updated as new activity is reported, your credit score doesn't exist until the moment it is requested by major lenders or others who require it for screening. These entities will contact credit reporting bureaus, the top three being Experian, Equifax and TransUnion, who will utilize information on your credit report to calculate your current credit score based on available formulas.
The factors considered for calculating your credit score are your payment history, length of credit, types of credit you are currently utilizing, total amount owed and any new credit requests. These criteria will provide the credit reporting bureaus with a score that falls into various ranges with the highest scores being the best. Your credit score is passed onto the inquiring establishment which will then use it to apply interest rates and terms as well as make other decisions based on where it fits in the scale being used. The most common scale used is the FICO credit scale.
Mistakes and Practices That Will Adversely Affect Credit Scores
There are various mistakes and bad practices that can have a negative effect on your credit score. Some of these may be well known to you while others may be totally unknown. Here are several of the top causes of a low credit score:
- Late Payment on Bills - This is one of the greatest factors for lowering your credit score and also one of the most well known. Late payments are submitted to the credit bureaus which record them on your credit report. If you are late on making payments often, it will damage your credit score significantly. Not paying at least the minimum amount due counts as basically the same offense.
- Having Too Much Debt - Many people believe that having more debt equals more credit weight. However, this is not necessarily true. If you have many outstanding loans or numerous credit cards with high use balances, your credit score will be adversely affected.
- Incorrect Information - If your credit report has incorrect information, it will cause your credit score to suffer. A large number of people never check their credit report which can accumulate a lot of misinformation such as old addresses or names (if you've married for example). Errors can also occur via information passed on by lenders, employers, landlords, etc as well as entry mistakes made by credit bureau personnel. It is therefore prudent to do credit rating checks and check your credit report regularly.
Tips for Effective Debt Management
In order to keep your credit score as high as possible, you will need to practice effective debt management. Budgeting, negotiating better interest rates, and consolidating and prioritizing payments are just some of the debt management tips that will help elevate your credit score.
It is well worth the time and effort spent on learning how to manage your debt and then building good credit, repairing bad credit and maintaining a good credit score. In doing so, you will save many thousands of dollars over your lifetime as well as be presented with better employment and rental opportunities. A good credit score is a key to the better things in life.