Properly managing your credit is one of the most critical responsibilities of the financially responsible individuals. Your credit score plays a major role in your financial life. Your credit score determines whether you are approved or declined for major purchases such as buying home, car, or receiving approval for a credit card. Your credit score will also impact the interest rate that you receive on your major purchases. While buying a car at a 0 percent interest rate for 5 years can be a wise financial decision, paying for the same car at an 18 percent interest rate is a poor financial decision. A car that should cost you $350 a month could end up costing you twice as much all because of a poor credit score. Credit scores are so important that a bad score can increase your auto insurance premiums and also increase the amount of the security deposit that you have to place on an apartment. A good credit score can save you hundreds of thousands of dollars in interest over a lifetime whereas a bad score can be an albatross that causes you to bleed money. Let’s take a look at a few tips that will show you how to build a good credit score.
What’s a Good Credit Score?
Different credit unions have different scoring models for what qualifies as a good credit score. According to Experian and Equifax, a good credit score is classified as a 670 and above. 670-739 is good, 740-799 is very good and 800-850 is exceptional. Transunion rates above 720 as a good score, listing a 720-780 score as a B and 781-850 as an A grade.
Paying On Time Every Month
One of the biggest factors to keeping a good credit score is to make all of your debt payments on time. This equates to about 35 percent of your credit score. Make at least the minimum payment by the due date. If you can only make the minimum payment; do it! Pay your mortgage, credit cards, and car note minimums within the due date to avoid being reported as a late payment. Late payments have a detrimental effect on your credit score and have to been known to drop credit scores up to almost 100 points. Any payment that is reported to the three major credit reporting agencies (Transunion, Equifax, Experian) as late will ding your credit. Past due bills can take a 750 credit score to 650 in a matter of months. It is important to note that most creditors do not report a payment as late until 30 days after the due date. This gives you time to make your payment if facing financial difficulties. You may still be charged a late fee for making a payment within the 30-day time frame but the payment will still be reported as paid as agreed.
Keeping Your Credit Utilization Low
Credit utilization is ratio of the outstanding credit card balances to your credit limit. It’s basically the percentage of your credit card limit that you use. Let’s say you have a Capital One card with a $2,000 credit limit. You make a few purchases and charge a total of $500 leaving you with $1,500 of available credit. Your effective credit utilization would be 25 percent ($500/$2000). Getting a credit score requires having a good credit utilization ration. This means making sure your card charges never gets close to the credit limit. A good credit utilization ratio stays under 30 percent. Never use more than 30 percent of your available credit if you don’t want your score to suffer. The irony of credit is that the less you use credit, the more it is offered to you. The more you use credit, the less it is offered to you. Credit utilization makes up 30 percent of your total credit score.
Keeping Your Paid Off Accounts Open
One of the biggest mistakes that people make when they pay off a credit card is immediately closing the account. Never close an account just because it is paid off. You may wind up hurting your credit by closing your oldest credit lines accidently. The length of your credit history matters making up 15 percent of your score. Keeping an older established account open with no annual fees actually helps to support your credit score. Your oldest accounts often have the greatest impact on your credit score. Closing these accounts also reduce the amount of your available credit thus limiting your credit utilization. Before closing your accounts, combine them. This is a method I have utilized in the past. I had two Capital One Cards a Quicksilver card with a $8,000 limit and a Platinum card with a $4,000 limit. Once, I paid off the balances on both cards, I combined them. I took the $4,000 credit limit of the newer Platinum card and added it to the $8,000 credit limit of the older Quicksilver card. This gave my Quicksilver card a new credit limit of $12,000. I then closed my Capital One Platinum card. This allowed me to keep my total available credit limit and to close a newer account without lowering my credit utilization.
Stop Applying For Credit
Too many credit applications and inquiries can temporarily hurt your credit. The mistake that people make when they shop for a home or car is letting too many lenders run their credit over too long a period of time. They will apply with one lender one week, another two the next one, another one the following week and so on. Two or more inquiries will lower your credit score. The trick is that whenever you are applying for any loan, take the credit inquiry hit all at once. Whenever I am buying a new car or getting a new credit card, I apply all of the places that I am looking to be approved the same day. I make a list of the cards that I am applying for and apply for all of them at the same time and then stop. Multiple inquiries within a short period of time lets the credit bureaus know that you are shopping for a particular product whereas multiple inquiries over a longer period of time equates to a higher risk profile. Credit inquiries typically drop off the report in six months to a year. New accounts equate to 10 percent of your score.
Mixture Of Credit Accounts
It’s important to have a mixture of credit accounts. A healthy credit score has a mixture of loan products including mortgage, automobile, and credit cards. This credit mix determines approximately 10 percent of your credit score.
Utilizing all five of these factors will help to build a good credit score and keep your credit score above 700!