How your credit score works can seem mysterious, with several factors intertwined in complex ways.
But following a simple recipe can help you build and maintain a good credit rating:
Pay everything on time.
Use less than 30% of your available credit.
Keep an eye on everything else.
This formula focuses your energy on the two biggest factors that influence your score: payment history and credit usage (how many limits you use). These two items make up the majority of your credit score, so managing them closely pays off.
The rest – like the types of credit you have, how often you apply for credit, and the loan balances you carry – not only have less of an impact, but they can be harder to influence.
Let’s break it down:
Pay everything on time
Most importantly – paying all of your bills (not just credit cards) on time every month is crucial to a good credit score.
The two FICO FICO,
and VantageScore, the two leading credit reporting companies, place the most importance on timely payments. A late payment of 30 days or more may damage your score immediately, dropping up to 100 points. Your lender or your credit card issuer may also charge you late fees.
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Simple tactics can help you pay on time and avoid damaging your credit rating. Set up automatic payments on your invoices. Or, if you’re not a fan of automatic payments or worried about overdoing your account, set a payment reminder, says Elaina Johannessen, program manager at LSS Financial Counseling, a nonprofit in Minnesota.
Setting up a reminder several days before the due date gives you time to transfer funds to your creditors.
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Use less than 30% of your available credit
The second factor influencing your score is the proportion of your credit available you use. This mainly applies to credit cards.
Credit usage is important for every card you have and for all of your cards. To keep things simple, don’t use more than 30% of your credit limit on any card. This will also support the overall use of the credit.
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While 30% is a good rule of thumb, the lower your spending on each card, the better for your score. Ideally, you want to keep it below 10%.
There are several approaches you can take to limit credit usage: If you need to make a large purchase, spread it across multiple cards. If your card issuers allow you to set alerts, ask to be notified if you’re approaching the 30% mark so you can switch to another card or make a payment. And if you can afford it, pay your balance in small installments during your billing cycle instead of waiting until the due date – this keeps your credit usage consistently low instead of letting it hit a low. Mountain peak.
Keep an eye on everything else
Once you’ve covered the big two, be aware of the other scoring factors, but don’t focus on actively managing them. Time and experience with different types of credit will automatically benefit your score.
Here’s what influences your score:
- Types of credit accounts: It is good to have a mix of installment loans and credit cards. Simply open a new loan based on your financial goals, and over time you’ll develop a mix.
- Average age of your accounts: Your score benefits from having accounts showing a long history of responsible use. Keep cards open unless there is a good reason to close one, such as a high annual fee.
- Recent credit inquiries: Try to space out credit card applications by about six months, as looking for a lot of credit at once is a red flag. The exception: Mortgage, student loan, and auto loan applications bundled into a two-week window only count one credit check because it’s clear you’re looking for rates.
- Total balances and debt: As long as you don’t pile up too much debt for your income, allow time to deal with it. A regular repayment record of balances will benefit your score.
It’s wise to periodically check your credit reports for errors and dispute any you find, says Johannessen. This is because your credit scores come from this data.
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“FICO scores only take into account information contained in a credit report,” says Tommy Lee, senior scientist at FICO. The same goes with its competitor, VantageScore.
You are entitled to a free annual copy of your credit report from each of the three offices: Experian EXPGY,
and TransUnion. TRU,
Also, get in the habit of checking your credit score regularly, as looking at your own score doesn’t hurt and can alert you to problems. Bonus: It also allows you to see your progress by following this credit scoring recipe.
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