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Understanding the Monster in the Closet: Credit

Going through life without understanding something as important as your credit score can have profound effects on your future and financial security. Hopefully we can shed some light on this.

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I have a confession to make. When I was a little boy, like many before me, I had the (ir)rational fear that there was a monster in my closet. I didn’t know what it was, but there as something that freaked me right out when the lights went out. Many times I would just try and ignore it. It was only when I just opened the darn closet one night, that I finally understood and began to respect my fear.

Credit is kind of like the monster you feared as a kid. It’s always there, but rarely shows its face. If you respect it, it wont bother you. However, treat it poorly and you’ll soon feel the consequences.

Many people go through their lives without understanding credit. There is hardly anyone to blame for this – its just not a topic many are given the chance to learn about. However to go through life without understanding something as important as your credit score can have profound effects on your future and financial security.

Before getting into how to maintain good credit, we must first establish what credit is. A credit score is a number which represents your credit worthiness. In simpler terms, your credit score shows how much you spend, whether the money you spend is your own or just debt, and finally, it shows how good you are at paying back that debt. This is a number which is tied to your identity – through your home address, your social insurance number, place of employment etc. This number fluctuates depending on a number of different things, such as how high of a balance you are carrying, or if you have missed a payment recently. The big thing to get out of this is that this number that is associated with your identity can be changed. It can be improved, or it can suffer. That is where you come in.

At Tekamar, we deal with all sorts of clients, from those with a credit score over 800 to as low as the low 400s. To give you some idea of what is good and bad, ideally your score is between 680 and 720, with anything above that being great. Along with lessons from past clients, and general research and phone calls with credit bureaus (the companies who track your credit scores) , we have come to find what works when managing credit. Here are some of the things we have found are good habits to maintain.

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  1. Pay your credit on time – This may seem like common sense, but one of the huge things that hurts peoples credit is regularly paying their credit cards late. Not just credit cards, but things like your cell phone bill can also affect your credit if it isn’t paid on time. You’re busy, I get that! If you struggle with this one, set up automatic payments with your bank. Its one less thing to worry or think about.
  2. Don’t exceed your limit – Just because you have the ability to spend 000 on your credit cards, doesn’t mean you should. Actually, we recommend that you don’t exceed 75% of your limit. This means that if your card has a 000 limit, you shouldn’t spend more than 50 of it.
  3. Pay the minimum payments – If it happens that you can’t make the full payment occasionally, at the very least, pay the minimum monthly payment. Paying the minimum ensures you don’t end up with a missed payment showing up on your credit report. Those hurt your score. Badly. So make sure that if all else fails, pay the very minimum monthly payment.
  4. Track your Expenses – Many times, people run into trouble because they don’t know what they are spending. Take the time to know your money – how much is coming in and how much is going out. By knowing this, you will have a lot more control over your spending habits. There are lots of ways to do this. Sit down once a month and take out that calculator and go to town. Another option is to go to your online bank, download a spreadsheet and track them with excel. If all of that sounds like too much hassle, I recommend finding an online service that can do it for you. Personally, I use Mint. It’s easy, it tracks it on my cell phone, and it’s free.
  5. Avoid trying to get more credit in a short time – Did you know car shopping regularly hurts peoples credit scores? What happens is the dealers each check your credit score to see if you qualify for car payments. When the credit bearueas see you applying or your account being searched frequently (such as car shopping over the weekend), they assume you need money which increases your risk and therefor decreases your credit score. Try and avoid people pulling your credit unless absolutely necessary. Also, avoid signing up for lots of credit in a short time – don’t apply for more than one credit card in a month.
  6. Know your Credit – You knew this was coming, didn’t you? That’s because it is very important to know your credit score. Not only can it help you catch identity theft, but knowing your own score can help you maintain or improve your credit. Look at it this way: if you see that your score is a little bit lower than it should be, then you will work to improve it. Ff your score is good, then you will know to continue what you are doing. Either way, it is essential that you check your score at least once per year. You can mail in to Equifax or TransUnion at anytime for a free report, or alternatively you can pay online (around 5) and just get it that way.

Just like dealing with a monster in the closet, if you ignore your credit, it could hurt you. However, if you look after, your credit will look after you as well.

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