A good credit score can help you in many ways. You can secure lower interest rates and terms on your loans. It may even help you get better rates on insurance. Your credit score changes quite often, though. Opening new credit, making payments, or racking up your credit card all affect your credit score. Knowing how to maintain a healthy score can help you get far in life. Let’s take a look at how you can accomplish this.
Know What Makes up a Credit Score
Many factors go into your credit score. Some have a higher impact on the score than others. They are as follows:
- Payment history – Makes up 35% of your score
- Utilization rate – Makes up 30% of your score
- Age of your accounts – Makes up 15% of your score
- Inquiries – Makes up 10% of your score
- Credit balance – Makes up 10% of your score
Knowing what affects your score the most, you know where you should place your focus. Now we’ll discuss how to make the most of these aspects of your credit score.
Make Your Payments on Time
First and foremost, make your payments on time. This includes all payments, even those that don’t report to the credit bureaus. Something as simple as a dental bill could wind up hurting your score. The dentist probably doesn’t report to the credit bureaus. But, if you let the bill go, the dentist may send it to a collection agency. That agency will then report the collection to the bureau.
Make a schedule of all of your bills and then pay them on time. Certain bills automatically report to the bureaus. Credit cards, mortgages, auto loans, and student loans are a few examples. Making these payments on time can help your score. Since this is 35% of your score, it pays to work hard and make your payments on time.
Lenders often look at your payment history in addition to your score. They look at certain accounts, such as a mortgage or auto loan. They want to see how you handle big financial responsibilities. The cleaner your credit history, the better chance you have for mortgage loan approval.
Watch Your Open Credit
Just because you have credit lines doesn’t mean you must use them. The best habit is to charge only what you can afford. This means only what you can pay off when the bill arrives. It makes sense to use credit for large purchases. You want the protection. But you shouldn’t make a large purchase if you can’t afford it right now. Your credit score does allow for 20-30% usage, but don’t get greedy. Getting into the habit of paying your balances off right away can only help you. If you carry a small balance moving forward, it won’t hurt you, especially if you already built a positive credit history.
If you find your utilization rate is too high, start paying your balances down. If you haven’t opened new credit recently, you may also take that route. Open a new card, but don’t use the balance. The new credit can help lower your utilization rate, which may help increase your score down the road.
Don’t Close Old Accounts
Don’t take spring cleaning to the extreme and close credit accounts you don’t use. The age of your accounts makes up 15% of your credit score. It doesn’t sound like a lot, but if you have all new accounts, it can drag your score down. Instead, leave the accounts open, just don’t use them. Let the older accounts help your score stay healthy. As you open new accounts, you need a good balance of old and new. This helps your score stay strong.
Watch New Inquiries
Every time you apply for new credit, the creditor reports an inquiry to the credit bureaus. This may affect your score by a few points. However, if you have multiple inquiries within a short period, it could affect your score even more. There is an exception to this rule, though. If you shop a mortgage with 3 or more lenders, it may only count as 1 inquiry. You must shop within a short period, though. You can drag it out over 3 months, for example. Those will each count as their own inquiry.
However, if you have multiple credit card or personal loan inquiries, those may raise a red flag. Not only will they affect your score, a lender will be leery of giving you new credit. The inquiries mean you may have opened a new account. It could take a few months before it reports on your credit report. This could make a mortgage lender worry about your debt ratio. Your credit report may not accurately reflect all of your debts just yet. Avoiding applying for any new credit before applying for a mortgage is a safe bet.
Keep a Good Credit Balance
Just like you likely diversify your investments, you should diversify your types of credit. Don’t open all installment accounts or all credit cards. Lenders like to see a good balance. Too many credit cards give you access to too much credit. The right balance is a few credit cards along with other types of debt including installment loans.
Monitor Your Credit Report
You should make it a habit to look at your own credit report at least once a year. The three credit bureaus offer a free credit report annually. This means you could pull your credit 3 times a year for free. Use the opportunity to look at your credit report. Go over each account. Is everything accurate? If so, and there are negative things reporting, fix them. Bring your accounts current, pay off collections, and balance out your types of credit.
If you find an error, provide the proper documentation to the credit bureau. It’s not a bad idea to contact the original creditor too. Figure out why the error occurred. If the credit bureau agrees with you, they will fix the error. They will then send you a new credit report so you can verify the change occurred. This is one of the most important things you can do for your credit as errors occur all of the time. You would never know if you didn’t check your report, though.
Ask for a Credit Report if You Get Declined
If a creditor turns down your application for credit, ask for a copy of the credit report used. This is another way to gain free access to your credit report. Although you don’t want to be turned down, you can use it as a learning experience. Figure out what made the creditor decline your application and fix it. This way your credit score can improve and you can get the future credit you desired.
Keeping a healthy credit score can help you in many areas of your life. Don’t make the mistake of focusing on just one aspect of your score. They each work together to make up a healthy score. Focusing on each category can help you improve your score and get the credit you deserve.