Having good credit is essential when you’re looking at investing in a new house or buying that new car you’ve had your eye on. But there’s much more to your credit score than you think. Though more ways exist to damage it than you probably knew, that also means there are more ways to fix it than you anticipated.
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What is a Credit Score?
A credit score is calculated from your credit report, and it shows potential moneylenders how much of a risk you are and whether it seems like you’ll go delinquent on any payments. The FICO score is the most widely used score (about 90 percent of the time, according to Bankrate), and you actually have three FICO scores. Each one comes from TransUnion, Experian, or Equifax. Your credit score comprises your credit history, the length of time you’ve had credit, how much you owe, any new credit, and what kind of credit you use.
Know Your Credit Card Balances
Many people think that as long as they pay off their credit card balances every month, their credit scores will be fine. It’s actually a little more complex. The balance itself gets reported, which means if you rely on credit cards for everything, even if you aren’t at all in debt, your score could be lower. You don’t want to let your card’s balance get any higher than 30 percent of the limit (10 percent if you’re really serious.) It might seem silly to have a $1,000 balance when you only use $300, but it’ll improve your credit score.
Only Use A Few Cards
Accumulating many credit cards is easy. Points systems at favorite stores, miles, cash back, and discounts for opening an account are all lures that pull us into signing up for new cards. Take stock of the cards you have. You only need a couple. Pay off the balances on those other cards, but don’t close them. The number of credit card balances you have affects your credit score (but so does closing a card, which is why you shouldn’t). Hence, even if you’re only charging a bit at your favorite store and then paying the balance immediately, you can still hurt your score.
Pay off Debts Intelligently
If you have to make a budget to get all your bills paid on time, do it. How timely you are at paying bills is over a third of your credit score. When you’re looking at making a big purchase, factor in what you need to keep your monthly bills covered. Keep in mind that it’s not always smart to pay off your debts early, either. People think removing all debt all at once is a good idea, but if you pay off a big loan all at once, your score actually goes down.
You usually have to wait a month or two to start seeing improvements in your credit score. Waiting for an improved score is worthwhile when it comes to interest rates, so take these ideas to heart to help slowly boost your numbers.