Today in this day and age, society lives in a credit based world. Almost everything you want to obtain is based on your credit score. Buying a home, buying a car, school loans, even employment can be based on your credit score. So isn’t it important to know your credit score? I sure think so! But what exactly is a credit score consisted of? Let me help explain that to you. You see a credit score is comprised of five components
- Payment History -35%
- Amounts owed - 30%
- Length of Credit History – 15%
- Lines of New Credit Established -10%
- Types of Credit in Use – 10%
Now that we know exactly what our credit score is made up of, we need to know how to achieve and maintain a healthy credit score, and also how to check our scores to assure it’s accurate. Now remember, you can’t drastically increase your credit score overnight, it takes time to create a good score, delayed gratification. Quick fixes and uneducated decisions can actually hurt your score more than it helps. There are 5 main ways to improve your credit score, and if followed correctly, you will be one of few Americans who can make the claim that they have good credit.
1. Make Your Payments On Time
As simple as this seems the fact is many people do not make their payments on time, but this is the #1 way to improve your credit score! Remember payment history accounts for 35% of your credit score, and they include credit card payments, mortgage payments, school loans, car loans, and utility bills. Late payments have the greatest negative impact on your score, so don’t miss any!
To build off of that Lets make one thing clear, a missed payment has the same negative no matter what the amount is. This means a missed $20 dollar clothing store payment has the same impact as a late $2000 mortgage payment.
If you want to increase your credit score start making your payments on time every month no matter what! If your payments are late because you forget to pay your bills every month, you can set reminders to help you remember! Many companies offer to send you emails to remind you before your bill is due. To take it a step further almost all companies today offer automatic payments debited straight from your checking account. Make everything automatic, and never forget a payment again!
2. Pay Down Your Balances
The next biggest component of your credit score is your capacity, which accounts for 30% of your score. This means when your credit cards are maxed out, you have very little, capacity. The lower your capacity is, the lower your score it. In fact, when you exceed 50% of your credit limit your score begins to lower. What’s even worse is when you have more than one card maxed out!
3. Never Close Any Lines Of Credit
A common myth about credit is that once you pay off your card, you should close out old and unused lines of credit. In actuality you should keep all lines of credit open, for those accounts are assets towards your credit score. The more open lines of credit you have the more capacity you have, which increases your score. By closing your credit accounts, you’re lowering your credit score because you no longer have the capacity that comes with the card. Remember, this accounts for 30% of your score. Cut up the cards that you no longer use, but keep the accounts open!
4. Only Apply For New Credit When You Need It
So we just got finished talking about how important it is to have multiple lines of credit, however this is best achieved by adding credit slowly, just remember delayed gratification. Opening multiple lines of credit in a short period of time will negatively affect your score. New credit accounts for 10% of your score, and constant new accounts and applications for credit can make a person look risky, and a possible liability.
5. Diversify Your Accounts
Having a variety of loans and bills will help with your credit score, rather than just having credit cards. It shows that you are responsible, and able to manage your credit payments. Mortgage payments, auto loans, school loans all affect your score. Your credit score also affects your car insurance premiums. Insurance companies believe that credit history can predict accident frequency, in addition to false claims.
Review Your Credit Report At Least Once A Year!
It’s very important to check your credit score AT LEAST once a year, honestly more frequency than that, and know where you stand! Inaccurate and outdated information can appear on your report at anytime, and this can seriously hurt your credit score. You are allowed one free report per year from all three credit agencies, provided by AnnualCreditReport.com. Not only can you find out your scores, but you can also detect identity theft.
