If you’re like most people, you probably don’t have a clue about your credit score or credit report. All many people know is that they affect how likely you are to get a loan, and if they’re bad, you might not be able to get one at all. There’s a lot more to credit than this, however.

1. What is the most important thing I can do for credit?

Keeping your debt low, the amount of available credit high, and your reliance upon credit minimal is the most important thing you can do. After all, when you have debt hanging over your head, not only does it just feel stressful and negative, but it can really affect your credit score depending on your credit utilization rate.

Some might argue that simply being aware of your financial situation is the most important thing you can do, because if you aren’t aware of it, ignorance definitely isn’t bliss. Even if you tend to try and avoid knowing about situations that stress you out, the stress of trying to avoid thinking about it and knowing in the back of your mind that something is wrong or wondering if you can really afford something will stress you far more.

2. What is the credit utilization rate?

Your credit utilization rate is the amount of credit you are using divided by the amount you have available. For instance, if you have $2,000 of credit available (through, say, a credit card and a student loan), and you’re using $500 of it, your credit utilization rate is a manageable 25%.

But if you have $20,000 of credit available through a homeowner’s line of credit and several credit cards, and you’re using $2,000 of it, you’re using 10% and you’re actually doing better in some ways than the person who has a 25% credit utilization rate – so long as you can afford to pay back that $2,000, of course.

Getting as much credit as possible but still taking out more than you can afford to pay back is foolish, as the timeliness of your payments is a huge component of your credit score.
3. What can I do to improve my credit when I have credit card debt?

The best thing you can do, besides sitting down to assess your financial situation, is to pay down your credit card debt. Of course, this will require planning as you figure out what you owe to which companies, etc.

This can be very simple: figure out exactly how much balance you are carrying on each card. If you don’t know and don’t have statements on hand, you can find this out by calling the number on each card and asking the representative. Make a list with the card name, the balance you’re carrying, the APR (the annual percentage interest rate) you’re paying for each card, and the minimum payments for each card.
Doing a little math can tell you how much you’ll end up paying on each card in interest by the time you get them paid off while paying the minimum amounts, and it will probably put the fear of debt into you.

When you formulate your plan to pay off the cards, you can either pay them off in order from smallest balance to largest, freeing up that amount you’d pay to each to tackle the largest debt last, or you can pay them in the order of percentage interest you’re paying. The first method is recommended for people who have difficulty staying or getting motivated to pay off debt, while the second is good for those who have the sticking power and want to save the most money possible.

4. What can I do to improve my credit when I don’t have debt?

Continuing to not hold any debt is one of the best possible things you can do in order to keep your credit great. This only goes so far, however; if you have no credit record at all because you don’t use credit cards and you later need to get a mortgage for a house, a loan for a car, or a student loan, you’ll be a higher-risk lender than someone who used a little credit every month and paid it back on time every month.

Putting a little amount on your credit card every month and paying it back on time (preferably automatically) every time will do wonders for your payment history and make credit card companies and lenders confident you will continue to do so.

Also, increasing the amount of available credit you have will help you increase your credit utilization rate very easily, even if you don’t plan to use all that available credit.

5. What is the worst thing I can do for my credit?

Abusing or misusing credit cards is one of the surest routes to financial disaster. It may not hit now – it may hit in five years, or even as long as ten years, or perhaps next month. What you can be sure of, though, is that when it hits, it will hit hard.

Always be sure you have the cash to pay off the credit card in full every month if you want to keep your credit the highest score and best report possible. Carrying a balance from month to month will affect your score and cause you to pay more in interest than you otherwise would have, so try to avoid it unless what you’re buying is truly crucial and you don’t have any other options. Even so, try to find a credit card with the lowest APR possible so you don’t have to pay too much interest.

There are a lot of factors that go into your credit score and report, but the first step to keeping them looking good is to understand what your own financial situation is like. This is one of the biggest things holding most people back from having a healthy financial life.

Having a good idea of what your credit score and credit report are, how they affect your life, and how you can keep them looking as attractive as possible will help you a lot when it comes to getting a large loan, getting a car, or getting a house.