Maintaining a good credit score is crucial as it allows you to obtain loans and save money on interest, insurance, and security deposits on everything from cell phones to utility services. But what exactly is it? How is the score calculated? How to keep a good credit score? And how can you monitor and improve your score?
Look no further, you will find all the answers to your most pressing questions conveniently compiled here to help guide you in building and maintaining an excellent credit score.
Check our guide to know the best ways to improve your credit score.
What is a credit score?
A credit score is a number that reflects the creditworthiness of an individual. Financial institutions look at scores when assessing an individual’s application for a loan. Your credit score is similar to a school’s GPA system.
Every lender has its own standards regarding what constitutes a good credit score. Generally, a good credit score range between 700 and higher than that. The higher your score the better your chances are of getting approved for a loan.
Factors That Determine Your Credit Score
The Fair, Isaac and Company (FICO) and VantageScore calculate scores of individuals in the US. Your scores from these agencies vary since they use different methods to calculate. Moreover, the credit scores provided by credit reporting bureaus such as TransUnion, Experian, and Equifax may also vary since not all creditors report to each of these agencies.
Most lenders use a blended credit score from each of the major credit reporting bureaus. While credit agencies are tight lipped on how score is calculated, experts suggest that the following factors impact your score:
Payment history: Individuals who have a history of successfully paying back loans have a higher score than those who have defaulted on one or multiple loans.
Amount owed: The larger the amount owed, the lower the score.
Length of credit history: Lenders can more accurately assess your responsible approach to paying back loans with a longer credit payment history.
Used vs. available credit: The lower the difference is between used and available credit, the more negatively it can impact the score.
Number of credit accounts: Successfully managing several different loans will result in a higher score compared to managing just a few loans.
Type of credit accounts: Your score will be higher if you have successfully managed the repayment of multiple types of loans such as credit card loans, student loans, auto loans, home equity loans, and personal loans.
Keeping an Excellent Credit Score
1. Make All Payments On Time
To keep it good, you should make all of your pending payments that are due on time. This includes not only major bills such as mortgage, car, or credit card payments but also payments such as utility bills, IRS penalties, and any accrued library fines. If left unpaid, the payments could then be negatively reflected on your credit report if it gets sent to a collection agency.
2. Keep Balances To A Minimum
Another important tip to maintaining your score is to keep your credit balances low. Avoid maxing more than 30 percent of your combined credit limit. For example, you should not go over more than $600 if your combined credit limit is $2,000.
3. Keep Credit Card Accounts Open
The length of your credit history will also have an impact on your scores. Credit agencies automatically remove closed accounts after 10 years. Closing an account will lessen your available credit. So, unless you plan on living a completely debt free life, you should consider keeping your accounts open.
The longer a credit card account is open, the more positively it will reflect on your credit score if payments are continuously made on time. However, to avoid paying interest on open credit cards, you should pay off your balance in full each month.
4. Avoid A Large Loan Balance
You should exercise caution about the amount of debt you currently have. Taking out new loans will increase your debt to equity ratio, which may make you appear as a risky borrower to lenders. Too much debt can also make it difficult to keep up with the payments. All of these factors could negatively affect your scores.
5. Avoid Too Many New Loan Applications
In addition, you should not make too many inquiries for new loans. This is important not to do, for it will negatively influence your overall score. Obtaining new loans will also lower your average credit age which will likely reduce your credit score as well.
6. Avoid Debt Settlement Options
Many people approach lenders in attempt to reduce the overall balance of their debt. Some lenders will agree to lower the debt in these instances. However, this signals your inability to make normal payments; the lender will report that you have entered into a debt payment plan to the credit bureau, which will still end up causing a negative reporting on your scores.
7. Avoid Taking Out Cash from Credit Cards
Taking out cash through your credit card is a big mistake that can end up causing a ripple effect. Credit companies generally charge more for taking out cash than for making regular credit purchases.
Apart from that, it also showcases the difficulty you are experiencing with managing your money which could also end up causing further damage to your financial health. You should limit the use of your credit cards for credit purchases only.
Good Credit Score
You should keep a close watch on your scores as it will help you to know whether your score has climbed or dropped. You’re allowed to order one free credit report from Equifax, Experian, and TransUnion every 12 months. In addition, you can use credit monitoring services such as Credit Sesame that watches for any unexpected changes in your credit report.
Regularly checking your credit card score will also allow you to identify errors in the report. Moreover, it will ensure that you are not a victim of credit card fraud or identity theft. Correcting any mistakes you may find on your report will help you to maintain a good credit standing.
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