Your Credit Score, if you didn’t already know, is extremely important. It can help you to get lower interest rates on everything from credit cards to mortgages, automobile loans, and practically any other loan you might need. Unfortunately, many Americans simply don’t know what to do, and more importantly not to do, in order to make sure that their credit score remains high. In fact, a survey last year by Credit.com found that, when it comes to credit scores, the average consumer doesn’t understand what actions will help and what actions will hurt their credit. Today’s blog will clear that up for you. Enjoy.
1. Payment History
The top factor for most scoring models is your payment history, making it vitally important that you always pay your bills on time. Even a payment that’s only 30 days late can drop your credit score, and a late payment can drop significantly. It doesn’t matter if you only pay the minimum, as long as you pay on time. One way to avoid paying your bills late is to set up bill payment automatically, which you can do with your bank or checking account.
2. Credit Ratio
A huge factor in determining your credit score is the amount of debt you have in comparison to the available amount of credit that you have. Credit experts will tell you that you should keep the credit to debt ratio or “credit utilization ratio” at about 10% of what your available credit happens to be. For example, if you have $10,000 in available credit, you should only be using about $1000 of it at any given time (or less if possible). Most consumers will notice that, after they pay off the money on their most used credit card, their credit score increases,
showing the importance of the utilization ratio. Now, if your credit cards happen to be maxed out, you definitely should consider taking a personal loan from your bank as the utilization ratio with personal loans is calculated differently and doesn’t have as much weight on your credit score.
3. Credit Balance
if you were to research people with the best credit scores, you’ll find that those with the very highest keep almost no balance on their credit cards from month-to-month because they pay them off and fall at the end of every month. One plus to doing it like this is that you will never pay a dime in interest. for most consumers this would kind of defeat the purpose of having credit but, frankly, if you can’t afford to pay your credit card bill at the end of every month, it’s possible that you shouldn’t be spending your money anyway.
4. Credit History
Consumers with the best credit scores are those with the longest credit history, usually 11 years or more. What that means is that, if you open several new credit accounts at once, your credit score is going to drop. It also means that you shouldn’t close any older and inactive accounts but instead keep them open and keep your history going. (The reason this happens is that your credit utilization ratio, referred to in #2, would increase.)
5. Credit Applications
Following on the heels of #4, try not to apply for every single credit line that you’re offered. Yes, having a healthy mix of credit, including mortgages, personal loans, credit cards and so forth, will show lenders that you can handle credit. On the other hand, multiple inquiries in a short period of time can hurt your score, especially if you have few accounts or a short history of credit.
6. Credit Cards
Lastly, be very careful about which credit cards you actually choose to use. Retailer credit cards, for example, can be the worst because they have incredibly high interest rates and low credit limits. You lose both ways because it hurts your credit utilization ratio and you pay a ton and interest. Also, unless the credit card that you decide to use has plenty of benefits, like cash-back rewards and frequent flyer miles, avoid one that has an annual fee.
Hopefully you now have a better idea of how your credit score works and what affects it the most. If you have questions or need advice, please send us an email or leave a comment and we’ll get back to you with answers and advice.