Photo credit: Cathryn Lavery
We've all heard how important it is to have a good credit score. Having a high credit score is vital because lenders use it to determine how creditworthy you are. But the thing about credit scores is that not many really understand how they work.
Your credit score is a number that falls between 300-900. The higher the number, the less risky you are in the eyes of lenders. What constitutes a “good” score varies by lender and the type of credit you're applying for.
That being said, you should always aim to keep your credit scores as high as possible. Here are six tips to help you improve your credit score.
Pay your bills on time
Paying your bills on time is one of the biggest factors that determines your credit score. Here's the funny thing: you don't even need to pay the full amount (although you always should). Lenders mainly care about you not missing payments, so as long as you're making the minimum payment, your credit score won't be affected.
Now, let's say you forget to pay a bill. After two missed payments, your interest rate will spike, your credit score will take a significant hit, and there's a good chance your debt will be sent to a collection agency. If this happens, this could affect your credit score for a very long time. Always pay your bills on time and preferably in full.
Don't max out your credit cards
Even if you do pay your bills on time and in full every month, you don't want to get into the habit of maxing out your cards. One variable that determines your credit score is your credit utilization rate. Generally speaking, you don't want to use more than 30% of the credit available to you. For example, if you have a credit card with a limit of $5,000, you don't want to carry a balance of more than $1,500 at any given time.
The weird thing about credit utilization rates is that you can fix it by requesting more credit. If you have a history of paying your bills on time, your lender will likely have no problem increasing your limit. Alternatively, it's better to have two credit cards with low balances instead of maxing out a single card. Keep in mind that having access to more credit can encourage you to spend more, so try not to abuse your credit cards.
Watch how often you apply for credit
Every time you apply for more credit or a loan, a hard inquiry is done on your credit history to determine how creditworthy you are. This check ends up reducing your credit score each time by about 10 points. It may not seem like a lot, but it can certainly add up.
The good thing is that your credit score will return to where it was at after a few months of paying your bills on time. It's not recommended to apply for a ton of credit cards at the same time, since lenders will want to know why you need access to so much credit.
Keep your history consistent
What lenders love to see if a consistent credit history. You could have been stellar at making your payments on time every month over the last year, but that's not a very long time in the eyes of lenders. Generally speaking, you'll want to keep your oldest credit card active even if you don't use it anymore since it'll show your history. You don't need to charge anything to the card, just don't cancel the card so it's "active" on your credit history. That being said, don't keep a credit card with an annual fee if you don't use it.
Check your accounts on a regular basis
You can keep your credit score in good standing by consistently monitoring it. It's a good idea to check your credit card statements weekly for any suspicious activity. If you find anything that doesn’t seem right, investigate with your lender right away to ensure that your credit cards or identity haven’t been compromised. You’ll also want to order your free credit report from Equifax and TransUnion to make sure that all the active credit accounts on your file are accurate. Remember, you can check your free credit score as often as you like: checking your own credit score won’t lower it or affect it in any way.
Start building your credit score
If you're looking to start or rebuild your credit, there is a simple way to do so. Secured credit cards allow you to load your card with money, which acts like a security deposit. You can then use that secured card like a regular card, but your limit will usually be a percentage of your deposit. As you make regular payments on time, your credit score will increase.
Note that secured cards are different from prepaid credit cards or gift cards. Prepaid cards where you load, spend, repeat don't help you build your credit history.
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