How to Maintain a Good Credit ScoreYou may not give a lot of thought to your credit score. Many people don't. But it can have a significant impact on your overall financial life, both positive and negative. If you have a good credit score, you can expect to receive better interest rates and terms when you purchase a big-ticket item such as a house or car. It also allows you to save money on insurance premiums and avoid costly security deposits with utility companies and cell phone service providers.
Millions of consumers have little or no understanding of what constitutes a good credit score and more importantly, what actions can severely damage it. How you use your credit plays a big role in maintaining a good score.
Understanding your credit score isn't difficult. Once you know how credit bureaus calculate your financial information to arrive at a score the picture becomes much clearer. The following suggestions should help you understand the process so that you can actively work at maintaining a solid credit score.
Ways to Maintain a Good Credit Score
To manage your credit and personal finances, you need to become familiar with every aspect of them. This includes your credit score. Here's what you should do to keep your score at a credit-worthy level:
- Know what makes up your credit score. Generally these five factors are used to calculate your credit score: your level of debt, your payment history, the mix of credit, how old the credit is, and any recent credit. Financial information such as utility payments or bank overdrafts normally does not affect your credit score.
- Maintain low credit card balances. As a rule, the higher your balances the lower your credit score. Most financial experts suggest carrying no more than 30% of your available credit as a balance at any given time. This means if you have a credit card with a limit of $2000, you should keep the balance below $600.
- Manage your overall debt. It's not just credit card balances that influence your score. Car loans, mortgages and other lines of credit can seriously impact your level of debt (which accounts for about 30% of your credit score). Remember, the lower your debt the higher your credit score.
- Never make late payments. This may be the cardinal rule of personal finance as well as keeping a good credit score. Always pay your bills on time. Most credit card lenders as well as other financial companies provide online payment options for customers. Set up automatic payments or pay your bills directly online to avoid costly late fees and penalties (and dings to your credit score). Forgetting when a payment is due should not be an option.
- Don't close old credit card accounts. When you close an account, your credit card issuer stops sending your payment information to the credit bureaus. If you have accounts which are older and fully paid off, use them sparingly and pay them off each month in order to keep them active. This will have a positive effect on your score.
- Apply for new credit sparingly. Credit inquiries only account for about 10% of your score but they can still knock 50-80 from your overall score. Try to keep new credit applications to a bare minimum.
- Review your credit report at least once a year. Every consumer is entitled to one free copy of their credit report from each of the major credit reporting bureaus each year. Be sure to go over your report at least every twelve months and check it for accuracy. Mistakes do happen. Identity theft and credit card fraud do occur and sometimes the only way to become aware of these situations is by looking at your credit report. You are legally allowed to challenge any false or out-dated information that is contained in your report.
Actions Which Can Damage Your Credit Score
Knowing how to maintain a good credit score is important. But it's also smart to be aware of other circumstances which can seriously hurt your score. Try to avoid the following financial actions, if at all possible.
- Always making late payments. Your payment history makes up 35% of your total score. Not only will consistently being late with payments dramatically lower your credit score, you will be throwing away huge amounts of money on late payment and overlimit fees. You also run the risk of being charged higher penalty interest rates.
- Not making payments at all. Paying late is damaging enough but completely ignoring your bills is even worse. If you are seriously overwhelmed with debt, seek credit counseling to find out your options.
- Having accounts sent to collection agencies. This usually occurs when your creditor has given up trying to recover the money you owe from you personally and sells it off to a collection agency.
- Filing for bankruptcy. This is probably the most devastating event that can damage your credit score. Always seek alternatives (such as credit counseling) before deciding on bankruptcy. On a somewhat positive note, over time and with careful planning and determination most people can re-build their credit after a bankruptcy.
- Going through a foreclosure on your home. The late-payments or non-payments on your mortgage will be noted on your credit report and will seriously impact your score.
- Closing credit cards which still have balances. If you are paying off your credit cards, don't close the accounts. This action makes it look like you have a $0 credit limit but still have a balance. Your credit score will take a tumble.
- Only having one type of credit. You need to show a mix of credit on your credit report. Generally this means some type of loan or loans and some type of credit card(s). Having just loans or only credit cards can negatively affect your overall score.
Your credit score is a very important number. Lenders use it to rate your credit-worthiness when you apply for any type of new credit. The higher your score, the better terms you will usually receive. Lower interest rates can save you a significant amount of money over the life of any loan and can allow you to put those savings towards other positive financial goals, such as savings or retirement.
For financial peace-of-mind, always know your credit score and keep a close watch on your credit report.