Financial independence means different things to different people. Maybe it’s having a certain amount of money in the bank, retiring early or becoming a homeowner.
Regardless of our personal definitions, a common factor that can help us on our journey to financial independence is having strong credit. Responsibly managing your credit affects more than just borrowing. It can affect routine matters such as having utilities connected, getting a cellphone or even applying for a job.
A 2015 survey revealed that 51 percent of Americans are proud of their credit score, yet at least 41 percent grade their understanding of their credit score a C, D or F. Because having a good score and understanding how it works is an important step in achieving financial independence, here are five ways to take control of your credit:
1. Monitor your credit reports. It is important to review your credit reports at least once a year with all three national credit bureaus: Equifax, Experian and TransUnion. Doing so can help catch errors or fraud and correct them before they affect your credit history.
2. Pay your bills on time. Your payment history makes up about 35 percent of your credit score, so making timely payments is important. One way to stay on top of your bills is to prioritize and schedule your monthly payments, and to pay at least the minimum balance every month.
3. Keep track of your credit balances. Try to stay on top of how much you’ve borrowed against your credit and be sure to stay within your budget and credit limits. One way to manage your balances is to use online banking to view your monthly statements.
4. Manage your debt-to-income ratio. Lenders use your debt-to-income ratio to assess your ability to pay back new debt. Keeping your payments much lower than your income can ensure a lower ratio, making it easier to qualify for new credit.
5. Avoid maxing out credit accounts. Maxing out credit lines can reflect negatively on your credit report. Most lenders offer alerts (such as email and mobile) and other services to remember upcoming payments.
Credit plays an important role in everyday life and your financial independence. Even small changes can easily turn into habits that can have a big impact.
Angelica Pulido-Hull is a district manager for Wells Fargo Bank in Las Vegas.