If there’s one thing the last four years have taught us, it’s that credit is a tricky thing. A struggling economy and damaged personal finances helped many of us wake up and realize our dependence on credit–and just how much debt we had actually acquired. For some time, it seemed like the solution was to swear off credit cards and never charge anything again.
At the same time, though, credit is essential to our financial lives. We know that our credit score is important, that it affects our ability to rent an apartment, get a loan for our education, or even take out life insurance.
But how many of us really understand what we can do to help or hurt that credit score?
A credit score, first of all, is a number between 300 and 850 that indicates what kind of risk you are for a financial company. The higher your number, the lower your risk level, and the more likely you are to get low interest rates on loans or get approved for long-term insurance policies.
There are many factors that can help or hurt your credit score, but five of them are so simple, they’re easy to overlook.
Making payments on time – helps!
It’s easy to get busy and forget about your credit card balance or loans at the end of the month. But making payments on time doesn’t just help you avoid accumulating interest. Your payment history is 35% of your credit score – over a third! If you credit score is lower than you want, paying your bills on time is the fastest way to improve it.
Opening too many new accounts or closing all your old ones – hurts!
Your credit history, is partially dependent on the age of your accounts, it makes up 15% of your credit score. Mature accounts indicate that you have managed payments for a long time, which improves your score. If you open several new accounts at once, or close several old ones, the average age of you accounts decreases, which lowers your score. If you need to add or close accounts, do so one at a time, leaving several months or even a solid year between changes.
Creating a credit history – helps!
It’s obviously not good financial sense to charge everything and run up debt, but having no available credit can lower your score dramatically. Rather than avoiding credit cards altogether, keep yours open, charge only $20-$50 per month, and always pay it off. That way, credit bureaus are still able to track your payment history.
You can never start too early developing a credit history. Some credit companies offer cards with low balances – under $1000 – specifically for students and young professionals, but they can be requested by anyone; being able to pay them off regularly can help you improve your credit score. But please note that having a credit card limit less than $2000 will hurt you too. It may not be much but it can still hurt. It also hurts when you run your above 75% of your credit limit.
Sign up for too many retail incentive programs – hurts!
Every time you apply for a card (i.e. Kohl’s, JCP, Target), the company issuing it will request your credit report. The number of times this happens is recorded. If the number is too high (typically anything more than 2), it can make you look desperate for credit, which looks bad. If you’re going to sign up for a retail incentive card, pick just one and avoid getting multiple hits on your score.
Creating a mixed credit history – helps!
That being said, having a department store card can help your credit score, as long as you pay it off on time. Lenders like to see customers managing different kinds of credit. If you have a Visa, a Macy’s card, and a loan that you regularly make payments on, then your credit history has good variety and your score will increase.
Credit scores can be tricky to manage, but once you know the basics, you can keep yours high and healthy. And don’t forget to check your credit report once a year to make sure there are no errors or adverse accounts that could damage your score.
I have occasionally mentioned about my credit score and even though I am still low I am working on improving it and I have a monthly payment to receive my latest credit score and it is constantly getting better. I am working on not putting myself back into the low credit score I had previously. Happy building!