When it comes to credit score, it is common to think that wealthy people have a perfect one. They have piles of money, big fat paychecks; they can never falter in repaying debt, right?
Piles of money do not guarantee excellent credit. Credit scoring algorithms don’t care about (or even look at) the number of zeroes on your paycheck. What really determines your credit score is how you use credit products.
This means that even the wealthy need to use credit wisely and steer clear of these common mistakes:
Quite often, wealthy people tend to stay away from credit. But the thing is, you cannot possible have a good credit score by if you don’t take credit in the first place. Paying for big purchases up front can save you money and help you avoid the risk of missing a payment, but it gets you zero points toward your score.
An easy way to remedy this issue is to open a credit card, set up a bill to be paid automatically with the credit card, and then set up the credit card to be automatically paid from your bank account.
Or, maybe take a car loan and then pay it off after a month (assuming there is no prepayment penalty). Accounts closed in good standing stay on your credit report for 10 years.
These are two of the many examples of how you can continue to maintain a cash lifestyle whilst also building credit. A track record of paying your debts on time is one of the biggest factors of a strong credit score.
Letting errors slide
Many a time, it so happens that while you’re filling your loan application, or applying for credit elsewhere, you accidentally enter wrong details – a common error is misspellings.
A misspelling can do more harm than you think. It can put someone else’s data on your credit report and tarnish your score.
Other than being careful, what you can do is check your credit report every once in a while to ensure that there are no discrepancies.
Maxing out credit cards
Even if you have truckloads of money, racking up high credit utilization isn’t great for your credit score. So while it is very tempting (and easy) to max out your credit cards, refrain from doing so.
Credit score calculators and lenders look at how much revolving debt you’re carrying, and what proportion of your spending power is tied up with debt. That means reviewing what percentage of your credit limit you’re using compared to your credit limit (on each credit card and overall). The lower this percentage, the better it is.
The other benefit of keeping debt utilization low is that you have wiggle room for the unexpected. Swipe your card too freely, even on a high paycheck, and you might not be able to charge an unexpected car repair, or you might struggle to pay off your full balance when the next statement arrives.
A change in lifestyle can also drown your credit score if you find yourself charging expenses you can’t pay off at the end of the month. A salary raise doesn’t help you avoid a paycheck-to-paycheck life if you add treats that eat up the extra money. A better plan would be to keep your lifestyle the same when you get a raise and increase the amount you save.
Forgetting to pay bills
Whatever you do, do not forget to make your payments as not only will it fetch you a late payment penalty, it’ll also tank your credit score.
You don’t just need to have the money to pay creditors. You need to take the next step and actually send the payment along, too. Wealthy people can miss or forget a payment just as easily as anyone.
Even if the overdue amount is small, the ultimate cost can be much greater if lenders won’t offer you the best terms anymore.
Set up auto-payment as often as possible and keep an organized bill-paying system. If you move, tie up loose ends like change-of-address forms promptly, or pay online so you’re not waiting on a piece of mail.
How to improve your credit score?
The key to improving your credit rating is to manage your debts well. Don’t miss any monthly payments, stick to the payment deadline, and stay within your credit limit. Also, don’t forget to review your credit report each year to ensure all the information held about you is correct. And of course amend any errors if you spot them.