When we think of our credit, we often think of “right now” credit. That is, we’re thinking of what our current credit score is and whether it will allow us to open the credit account (i.e., mortgage, car loan, student loan, etc.) that we need… and we’re thinking about what immediate changes we can make to positively influence our score in the short term.
But that’s only part of the picture. A recent college grad might be focused on their “right now” credit to help them rent an apartment, but a decade from now that credit will be used to buy a house and a car. And a new couple might be focused on their “right now” credit to get their first house, but a decade from now that credit could be used to buy a minivan and buy a bigger house with room for the kids. Having a higher credit score gets you better interest rates on credit, so you pay less money over the life of the loan than you would if you had a low credit score. This is a great reason to have a long-range plan to build your credit.
We focus on our “right now’ credit, but we should also have a plan for a decade from now. Here are some ideas to help you put together a 10-year plan for your credit.
Your 10-year credit plan can start any time. This isn’t just for young people. In fact, if you’ve had a major financial event (such as a bankruptcy) then this is the perfect time for you to establish a long-range plan so that your credit will be in better shape when your bankruptcy falls off your credit report.
Start immediately; don’t wait for the New Year or the beginning of next month or next Monday. Start this instant. Ten years from now, you’ll be reaping the benefits of making changes today.
List your life’s dreams and the credit you’ll need.
If you plan to buy a new car in five years and a new house in 10 years, you’ll likely need a loan for those purchases. List all of your life’s dreams and goals and then figure out what credit score you’ll need by those dates. Keep this list handy as a motivational reminder of what you want to achieve in life.
Build goals around key credit factors.
Rather than building goals solely around your credit score, focus on your actions by building realistic short-term and long-term goals for the factors that influence your credit score.
Utilization ratio: “In one year from now, I will have paid my credit cards down to within 20% of the credit limit.”
Credit mix: “I will get a new credit account or other type of loan in two years so that I can show good payment behavior with different types of credit.”
New credit: “I won’t take out too much credit too often. I’ll only plan to apply for the amount of credit I need (in the amount that I know I can pay responsibly), and only when I need it.”
On-time payment: “I will make my loan payments on time every month.”
Outstanding debts: “I will pay off my $200 debt collection item by paying $25/week for the next eight weeks.”
Consider making goals for one year from now, two years, five years and 10 years.
Set dates to check.
Goals are only effective if you are taking action on them. So set dates in your calendar to…
Regularly check on the actions you will take (based on the goals you set in the last step).
Regularly pull your credit reports. Do this at least once every four to six months. You can get your credit reports for free once a year from each of the three major credit reporting agencies.
Regularly monitor your credit score for changes. There are many free tools on the market that allow you to monitor your credit scores. Credit.com offers a tool like this, and it also gives you a breakdown of the factors that influence your score.
Regularly revisit your list of your life’s dreams and your list of credit goals to update them. Do this at least once a year, or (better yet) every time you pull your credit reports.
Focusing on “right now” credit is important, but you’ll enjoy a healthier credit that is built on a nice, strong foundation if you also create a 10-year plan for long-term credit.