Overlooking the importance of the credit score is one of the biggest financial management mistakes one can make. The credit score is basically the mirror of your financial responsibility, which is why banks and other lenders check the score of potential customers prior to lending them money.
This three-digit number tells lenders how likely you are to repay a loan in a responsible and timely manner. A bad score, of course, is not going to get you approved for loans very often or, in case it does, it may cost you hundreds or thousands of dollars in premiums, which you wouldn’t have to pay if you were to have a good credit score.
It is in your best interest to keep this score as high as possible, which will take some work and responsibility on your part. It’s not that difficult to get a high credit score or even to fix a bad one and once you do get the score you are satisfied with, it is important to know how to keep it balanced.
The credit score largely depends on your credit history as one of the most important factors that show your financial responsibility. The credit history is information based on which lenders decide what loans you qualify for and what interest rates you will be paying.
Every action you take with your credit is going to be presented in your credit history. Some of those actions can affect your credit history and score negatively, which is why you need to put some effort into controlling your finance related activities to ensure a good credit score. Sometimes, of course, things that are out of your hands are going to affect your credit score badly, but that is nothing to worry about. Even though you cannot control situations like that, there are other ways you can bring the score back up.
In a nutshell, the better your credit score is, the more likely you are going to be approved for loans you are interested in. A high credit score brings along other benefits such as better interest rates and discounts on premiums. However, don’t stress about your credit score being perfect, as it doesn’t have to be. In fact, it’s nearly impossible to have a perfect credit score all the time. Just make sure you are doing your best in paying bills and loans on time and trying to balance a good score.
Here are ten things you should know if you want to keep your credit score high!
1. Checking Your Credit Report
Checking your credit report is the first step toward improving your credit score. People often confuse credit reports with credit scores, so we are going to get that out-of-the-way by explaining the difference of the two.
A credit report is a detailed report of your credit information including a history of activities, balances, bankruptcies, delinquent payments, etc.
Whereas, a credit score is a three-digit number based on the credit report which tells your average score when it comes to timely payments, debts and other credit activities.
It is important to check your credit report every once in a while for two reasons. Firstly, the report will tell you how well you are doing in managing your finances. This is important information to you because you have to track all your credit activities in order to keep a good score if you’re planning to get a loan. Even if you haven’t thought about getting a loan in the near future, you still want to keep your score high for future situations.
Secondly, you need to check your credit report for errors, as it often happens that there is an error in the data. For example, there could be incorrect information on the report that lowers your credit score such as incorrectly listed late payments or incorrect owed amounts on different accounts. As you don’t want that to happen, you must dispute all errors you find, which you can do in the credit bureau. Remember, the sooner you dispute all errors, the better it is for your score.
Requesting your credit report directly from the credit reporting agency does not affect your score, so you can do it as many times you want to. Make sure you check it at least once a month, especially after major credit activities.
2. Understanding The Credit History
Your credit history is one of the most important factors lenders are going to be looking at when deciding whether or not you’re a good candidate. The credit history lists all your credit activities, whether good or bad. Therefore, you must aim to pay your bills and loans in time in order to have a good credit history.
Being late when it comes to payments has an enormously negative effect on your credit history and the image you are sending to lenders. Seeing that you are often being late for payments, lenders are going to assume you won’t be able to pay out their loan in a timely manner either and, thus, won’t proceed to approve you.
If you are late to one or two payments, that’s not a big deal but if you are constantly being late, that’s going to turn on a red light when the lenders scan your credit history. If you are currently late for any payments, try to pay those off as soon as possible.
Of course, everyone makes mistakes or isn’t able to pay certain payments in time, which is okay if it doesn’t happen too often. You don’t have to stress too much about few late payments as their effect on your credit history will decrease over time. Older payments are less relevant than recent ones, so if you focus on correcting your mistakes, the ones you made in the past will become irrelevant.
Another thing you should do is leave the debts you paid off in a timely manner instead of getting them off your report. These debts are also called the “good debts” because they show you are able to pay off loans in a timely manner, just like you agreed to do. Leaving the good debts on your credit history is going to improve your score and make you a more appealing candidate for future loans.
3. Automating Payments
This is going to add on to the tip you read previously, which is that you should pay your bills and loans in time in order to keep a good credit score. However, even though there are serious reasons why people are unable to pay a loan in a certain moment, they sometimes miss it because of simply forgetting about it.
This mistake happens when we are too busy with work and other issues and have that payment completely off our minds. However, even though you are able to pay it a few days or weeks later when it comes to mind, it will still create a bad picture on your credit history.
Therefore, to ensure yourself you won’t be making this mistake, you can do one of the following:
Set up payment reminders – Some banks offer a service called “payment reminders”. This is a very convenient thing because you can sign up to get a reminder via text messages or email every time your payment is due. That way you won’t have to worry about skipping any payments and you don’t have to occupy your mind with due dates.
Automate your payments – Enrolling automatic payments is another great way to ensure you never skip a due date. As the term suggests, these payments are automatically debited from your bank account through your credit card and loan providers.
What also helps stay on track with all your payments is keeping a separate calendar dedicated to financials only. This way, you will always have a clear presentation of all your financial responsibilities and you won’t miss any, which will keep your credit score high.
4. How Changes Affect Your Credit Score
A credit score is never a stable, as it always prone to change due to different factors. Specific actions will cause your credit score to increase or decrease, depending on the action itself. As credit scores are based on the information from your credit report, any changes in the report will immediately affect your score.
What you must consider is that one single thing can affect multiple items on your credit report. For example, if for some reason you decide to close two accounts you own, that action will not only lower the number of owned open accounts but it will also decrease the total amount of available credit and increase your utilization rate, which we will discuss later.
As you can see, one single action can cause a chained reaction eventually leading to your credit score increasing or decreasing. Therefore, you must look into the possibilities that may take place if you take certain moves that affect your credit report. It is, however, difficult to accurately foresee how one specific action will impact one’s credit score.
If you’re not sure whether taking a certain action is a safe move, make sure to check your credit report, consider what consequences the action may cause, and if you’re still not sure, get some advice from a professional. Either way, you must know that the credit score is a number that’s constantly changing according to your moves so you have to balance out your actions in order to keep your score consistent. With your credit score report you will also get the credit risk factors, which is information that will give you insight on what kind of impact certain actions will have on your score, which we will discuss below.
5. Finding Factors That Lower Your Credit Score
As we mentioned above, each person’s credit score is different and brings along different risks. On your report, you will get a quick insight into the factors that lower your credit score and actions that may be too risky to take. Of course, certain factors are more important than others, as they affect your credit score more.
To find factors that lower your credit score you must check your credit report, which brings us back to step one again. However, it is important to emphasize the process of finding these factors as that is a crucial step when trying to improve your credit score. It is possible that the report contains incorrect information and thus is lowering your score, which is a common situation.
The two factors that are definitely most important when it comes to credit score calculations are the payment history and the credit utilization rate. Bad credit history has possibly the worst impact on a credit score and, if you find that to be the factor that is lowering your score, you must start working on improving the history as soon as possible. The more positive actions you gather in your payment history, the sooner your credit score will increase.
Other factors that may be lowering your score are late payments, high credit balances, moving the debts around, etc. What’s important to remember is that each person’s credit score is affected differently by different factors. You have to find what is causing your score to be low and work on that specific factor.
Logically, to improve your credit score you must first bring it to a decent level and learn how to be consistent with your actions and keep the score in place, if not even moving up.
6. Reducing Your Debts
One of the best things you can do to improve your credit score is reduce your debts. This obviously sounds easier than it is to actually achieve but don’t worry, there is a process you can follow to get there. Firstly, stop using your credit cards and get your credit report.
From there, extract a list of all your accounts and recent statements to see exactly how much you owe on each account, as well as what interest rates you must pay. With this information at your hands, organize your budget to start paying off those debts. Always start by paying out the highest interest rates first.
Try to focus on achieving this by putting aside as much budget as possible for paying off these amounts. On other accounts, try to maintain minimum payments. Some people keep moving their debts around, which eventually causes their credit score to drop drastically. Instead of doing so, it is much better to actually pay off those debts as soon as possible.
In some cases, people are having trouble paying off their debts and making ends meet at the same time. If you find yourself in that situation, it would be best to look for a good credit counseling service to help you out with your issue.
Reducing your debts and keeping the payments minimal is going to have a great impact on your credit score. However, if that’s going to cause you more trouble in the financial aspect of life, don’t put all your money towards achieving this goal but rather do it gradually. Starting today, a step by step process is going to get you to your goal sooner or later. Besides, credit counseling services are always available to clear out any confusions or concerns regarding your credit status.
7. Controlling Your Balances
Your balances say a lot about your credit responsibility. A very important factor that impacts you credit score is the amount of revolving credit you have versus the amount of credit you are actually using. The smaller the percentage of this calculation, the better it affects your credit score.
The optimum number you should go for is 30% and even lower if possible. To achieve this, you should pay down your balances and try to keep them low most of the time. If you have many small balances on a number of different credit cards, it would be best for your score to try and eliminate all of them.
You may want to get informed whether the credit card issuer accepts multiple payments throughout the month. If so, you would be able to improve your credit score by lowering down multiple balances over a month of time. Something you should definitely avoid doing is charging different amounts on different cards instead of charging the whole amount on one card. For example, charging 60$ on one card and 40$ on the other would hurt your balance more than charging the full 100$ on the same credit card.
Lowering your balances is the first step to controlling them and, once you reach that desirable goal, try to be consistent with your payments to keep those balances in place. Besides controlling the balances, you can significantly boost your credit score by avoiding charging separate amounts instead of one full amount on one card. The more you avoid things that sink your credit score, the better are the chances to improve it. Remember to gather information of all your balances and start controlling them as soon as possible to get that score rising faster.
8. Understanding The Credit Limit
Having a good understanding of the term “credit limit” is going to help you find ways to boost your credit score and gain the loans you are interested in. A credit limit is the maximum amount of credit a certain credit card company allows you to spend on a single card. It is also the maximum amount of credit an institution will lend you.
Credit limits are not the same for every borrower. Each credit limit is set according to your information specifically. The thing about credit limits is that they appear on your credit report and, since the credit score is based on this report, the credit limit is going to take part in forming your credit score.
Simply put, the higher your credit limit is, the more it hurts your credit score. Why is that so, you may ask? Lenders and credit card companies see a red flag every time they notice a high credit limit because it tells them there are certain danger present with the potential borrower. Borrowers with high credit limits may max the limit out and possibly be unable to repay it later, which is why lenders don’t like seeing high limits on people’s reports.
Besides high credit limits, multiple lines of credit on a credit report can hurt your score as well. In some cases, to prevent the high credit limit from lowering their score, people request creditors to lower the limits. This way they can avoid the effects of a high credit limit on their credit score and ensure their score is high enough for the next loan they want to get.
Remember, the lower the credit limit, the bigger are the chances lenders are going to approve you for desired loans. If you have high credit limits, make sure to send a request for lowering those before applying for a new loan.
9. Improving Your Credit Utilization
Credit utilization is one of the major factors that affect your credit score, right after the payment history. The above mentioned credit limit affects your credit utilization, which is another reason why you should be taking care of it. Your credit utilization ratio is a result of a simple calculation: dividing you total credit balances by your total available credit, that is, your credit limit.
In this case too, the lower the result, the better it is for your credit score. Therefore, it is best to have a low credit utilization ratio when wanting to improve the overall credit score. 30% or lower is the optimum amount you should be aiming for when it comes to the credit utilization ratio. If that seems impossible at the moment, don’t worry, start working on it step by step and it will eventually lower down to the desired amount.
The reason why low credit utilization ratios are preferable is because this information tells lenders you haven’t maxed out your credit limits. That means you are financially responsible and you can manage your credit well, which is what they look for in new borrowers. High credit utilization ratios, on the other hand, tell the lenders you don’t really know what you’re doing when it comes to keeping a good credit score.
When it comes to improving your credit utilization ratio, you can do two things. Firstly, take care of your credit limit by ensuring it is as low as possible (we explained how to do that in step #8) and secondly, pay off your debts and keep those balances low. We’ve also went over that in the above sections of this guide. As long as you keep consistently checking your balances and controlling them while keeping the credit limit as low as possible, your credit utilization ratio should work in your favor.
10. Using Several Different Credit Cards
Now here’s a thing, for some reason people think opening up new credit accounts is going to improve their credit score, which is not the case. Having several credit cards wont directly hurt your credit score but it wont do it well either. What does hurt your score, however, is the way you handle that amount of credit cards you own.
Each credit card drags along its credit history, the payment history and the amounts you owe, which are factors that indeed have lots of impact on your credit score. With a more than necessary amount of credit cards, you may find it difficult to keep track and control all these factors in order to maintain your good credit score.
Besides, opening up lots of new accounts in a short period of time is a red flag to the lenders. Lenders find this activity risky, which is why they might deny you the loan you applied for. Besides, opening up to many new accounts will lower your average age, which also has its effect on your credit score.
Therefore, don’t open new credit cards unless it is necessary and especially avoid doing so in a short amount of time. You don’t want to seem like a risky player to the lenders because they usually put those aside or assign them higher interest rates to pay. To keep your credit score fit, it is better to focus on controlling the accounts you own, rather than opening up a bunch of new ones because you think that may be good for your score. Stick only to the accounts you need and invest your time and money into those.
What Not To Do
Sometimes it is best for your score to, instead of trying to figure out how to improve it, stop doing things that are keeping it down. Once you understand which factors and activities are keeping your score down, you will more easily pick it up and grow it to the desired amount. So, what not to do when it comes to taking care of your credit score?
For starters, don’t close your unused credit cards thinking it may raise your score a bit. In fact, keeping these cards open is doing a favor to your score because, as long as you don’t use those balances, the unused cards have a good effect on your report. As we already explained above, don’t open lots of new credit cards just to increase your score because it doesn’t work that way.
One of the best, yet most difficult, tips to implement is to be consistent with your payments and don’t miss any. As difficult as it is to pay all bills in time, the more you do it the better it is for your score.
If you see any errors or negative information on your credit report, don’t ignore it as that is keeping your score down most of the time. Instead, dispute all errors and try to work on the negative aspects to bring them to the positive side. Last but not least, don’t stress too much about keeping your credit score perfect. Lenders aren’t looking for perfect scores, all they want to see is that you know what you’re doing when it comes to finances and that you’re responsible enough to pay all your debts in time.
Conclusion
Altogether, if you’re hoping to get new loans it is in your best interest to work on improving your credit score. You can do so by following the ten tips we have given you above, which you should start implementing as soon as possible. Besides focusing on increasing your score, you should focus on not lowering it any further as well. Therefore, avoid doing actions that are bad for your credit status because once they’re on your credit report, they’re going to stay there for a while. Don’t stress too much about past mistakes because more recent information always matters more than old information. Thus, the better your actions are from now on, the sooner your credit score is going to jump back up.
If you’re struggling financially and can’t get a hold of a good score while fulfilling your other financial needs, you can always turn to credit counseling services for help and they will find the best solution for you!
