Americans seem to be getting better at avoiding bad credit, according to a report by CNN Money. The average credit score in America is now at 700, the highest it’s ever been since FICO began tracking 12 years ago.
But why do you need to care about your credit score? Well, your credit score is worth its weight in gold. It’s a big deal to people who are interested in hiring you, doing business with you or even dating you. Landlords, insurance companies, potential employers, and lenders are likely to check your credit standing to understand how you’re faring at money management. This way, they’ll know the risk they’re taking by partnering with you.
So, let’s look at some effective ways of avoiding bad credit:
- Pay your bills on time.
This should be your priority each month.
The biggest factor affecting your credit score is your payment history. Missing a single payment can ruin your credit standing. What’s more devastating? Consecutive late payments can lead to foreclosure or your account being sent to a collection agency. An account in collections is reflected on your credit report for seven years starting from the date of your first late payment. It stays there even after you’re able to pay it off.
- Carry a safe amount of credit.
Missed payments are often caused by too much debt. So, make sure your debt load is within reason. One way to do this is to follow the 28/36 Rule. Don’t spend more than 28% of your gross income on mortgage, property taxes, home insurance, and other housing expenses and spend only up to 36% of your gross income on total debts.
For instance, if your combined yearly household income is $150,000, following this rule means your housing expense shouldn’t be more than $42,000 annually or $3,500 monthly. Your other debt payments shouldn’t exceed $12,000 annually.
- Live within your means.
A new car or a new baby is a new expense that affects your capacity to make ends meet. Consider how a new expense will affect your budget before committing to it.
- Consolidate your debt.
Having multiple debts can be overwhelming. The different due dates can sometimes cause missed payments. When debts start to pile up, it’s wise to take out a new loan to pay off existing ones. This is called debt consolidation.
One way to consolidate your debt is to use a peer-to-peer lender like Prosper. Their loan approval rates are higher than banks. And while approval varies on a case by case basis, you’ll have a better chance of getting approved even with a less-than-stellar credit score.
Would you want to get sued or have collectors go after your property? Or would you rather get a debt consolidation loan with Prosper?
Avoiding a bad credit score starts with recognizing when you’re having financial trouble. Maintaining a good credit standing can become an uphill battle when you’re not being mindful of your financial status. Avoid bad credit by making the right choice today.