How to Build and Maintain a Strong Credit Score
- Wednesday, August 01, 2012
Benjamin Franklin once said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”
Financially, your reputation boils down to a three-digit number: your credit score. Each credit-related action you take is recorded, tallied, and turned into this increasingly important number.
A good credit score will help you get the best rate on a mortgage and a lot more. Insurers, cell phone providers, and a growing list of other companies base their decisions about working with you and at what rates, in part, on your credit report and/or score. More and more landlords and employers check the same information before renting you a place to live or offering you a job.
Clearly, building and maintaining a strong credit score is important. That’s why the eighth of my 11 principles for simple, meaningful success is to Manage Your Number.
Pay Your Bills on Time
Thirty-five percent of your credit score is based on your track record of paying your bills on schedule. Do all that you can to pay your bills on time.
Most credit card companies will send you an e-mail alert a week or so before your next payment is due. Sign up for these free alerts. If you are using an online budget tool such as Mint.com, it will send you alerts as well.
Be Careful About How Much Credit You Use
Thirty percent of your credit score is based on how much you owe. What is especially important is how much of your available credit you are using (“credit utilization”) across all of your credit cards and on each individual card.
Using 30 percent of your available credit or less is good; 10 percent or less is ideal. This goes for people who pay their balances in full each month, not just those who carry a balance.
Give It Time
Fifteen percent of your credit score is determined by how long you have used credit.
I’m often asked in workshops whether to close old, unused accounts. This is generally not a good idea, but not because doing so will erase your credit history. When you close an account, positive information about the account stays on your report for ten years, negative information for seven years.
The problem with closing an old account has to do with credit utilization. Closing an account lowers your total available credit, which may increase your utilization, and that can lower your credit score.
Be Cautious About Opening New Accounts
The amount of credit you have applied for recently impacts 10 percent of your score. As you shop your way through the mall, opening new credit card accounts in order to get all those 10 percent discounts tends to discount your credit score.
Use Various Types of Credit
Your mix of installment loans, revolving credit, and/or a mortgage is an important part of the final 10 percent of your score. Installment loans are those with a fixed payoff period, such as a vehicle or student loan. Revolving loans are open-ended loans, such as credit cards.
Having some of each type of credit is ideal, at least according to the credit bureaus. However, I don’t recommend taking on new loans just for the purpose of trying to improve your credit score.
Review Your Free Credit Report
Everyone is entitled to one free report each year from each of the three credit bureaus: Experian, Equifax, and TransUnion. Get your reports at AnnualCreditReport.com. Here’s what to look for in each of their major sections:
Credit summary. Toward the top of your Equifax report, under “Accounts,” you will see your credit utilization, or what it calls “Debt to Credit Ratio.” This is the area you can do something about to impact your score the most in the least amount of time.
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