Written By: Jen Pieson
Creating and keeping good credit is something at which you have to work. There are many ways to make sure that your credit is the best it can be, but even when you attain a good credit score, the work does not end there; maintaining good credit is an on-going process. Following are some ways to make sure that you’re doing everything you can to keep your credit in a range that’s acceptable to you.
Pay Your Bills on Time
This may seem obvious, but paying bills on time has a major impact on your credit. Credit scores are calculated on several factors, and payment history makes up the largest factor: 35%. As a rule, the most important bills to pay on time are:
1) Your mortgage
2) Other loans (including credit cards, school loans, auto loans)
According to the financial website Bankrate, one single 30-day late payment can bring down your credit score by as much as 110 points.
Auto-pay (setting up your bill paying online) can prevent late payments, but you still need to monitor your accounts to make sure that everything is flowing smoothly. For example, if your mortgage is set up to automatically pay on the 30th of every month, but your bank account doesn’t have enough cash to cover the bill, will your bank cover the shortfall? If so, what will your bank charge you for that convenience?
It’s All About Balance
30% of your credit score is based on how much you owe. This includes not only the total amount of money attached to your name (mortgage, credit card balances, etc.) but also the ratio of how much you’ve borrowed compared to the amount for which you’re approved. For example, if you have a balance of $3,000 on a credit card (even if you plan on paying it off at the end of the month) and that card’s limit is $4,000, you will take more of a negative hit to your credit score than if you had a $3,000 balance on a $10,000-limit card. If possible, make big purchases on cards with higher limits.
Don’t Close Old Cards Right Away
15% of your credit score is based on the length of your credit history. If you have an account that you no longer use, but is in good standing, leave it alone until you understand the impact removing it will have on your credit score. Closing a ten-year-old account will make your credit history appear younger, and you will take a negative hit for that.
Use Caution When Opening New Cards
10% of your score is based on how many accounts you’ve opened recently, so try to plan ahead. If you know that you’re going to be applying for a car loan in three months, don’t apply for credit or store cards in the meantime, unless it’s absolutely necessary.
The Last 10%
The remaining portion of your credit score is made up of the types of credit you use, including Home Equity Lines Of Credit (HELOCs), retail credit, school loans, mortgages, etc.). Each account that appears on your credit report is one of three types: revolving, installment or open. Following are examples of these types of accounts:
* Credit Cards [issued by a bank, credit union, other financial institution, retail store or oil company]
* Loans [auto, mortgage, signature, home equity, student]
* Mobile Phone
* Utilities [cable, water, power, etc.]
So what’s the ‘right’ mix of these accounts? There is no perfect formula for success in this area, but there are some guidelines. It’s important to diversify; to have a good mix amongst these types of accounts. A credit report showing 3 revolving accounts tends to have a higher score than a report showing 18 revolving accounts. Some other factors that apply to higher scores in this area are: Having a mortgage, Avoiding finance companies (often considered a ‘last resort’ for credit), and Having a car loan (old or new) on your report.
Check Your Credit Report (at least annually)
“Annual Credit Report” is the legitimate site that allows you to view your credit report from each of the three main credit bureaus once per year. You do not have to view all three reports at once; you can view one each every four months, to spread your free reports over the year. For example:
* Experian: February
* Equifax: June
* TransUnion: October
Please type the following directly into your browser to visit the site: www(dot)annualcreditreport(dot)com (for security purposes, I broke the link. Replace the (dot)s with periods).
You can view your report(s) for free, but you do have to pay if you want to see your numerical credit score. The website has a comprehensive FAQ section that is quite helpful if you have any questions about how the free reports work.
Know Where You Stand
* Excellent Credit Score: 720-850
* Good Credit Score: 680-719
* Average Credit Score: 620-679
* Poor Credit Score: 580-619
* Bad Credit Score: 500-579
* Miserable Credit Score: Less than 500
Having a good or excellent credit score benefits you in two ways: it makes it easier for you to obtain a loan and it gives you access to better rates. Mortgage applicants with ‘excellent’ credit scores can be offered interest rates up to 25% lower than applicants with ‘average’ credit scores. This can translate into tens of thousands of dollars in savings over the life of the loan.
For example, consider applying for mortgage loan for $300,000 (30 years):
Applicant 1 Applicant 2
Credit Score: 740 640
Interest Rate: 4% 5%
Monthly Payment: $1,432 $1,610
Total Interest Paid: $215,509 $279,767
That’s a difference of ‘only’ $178 per month, but it’s a difference of $64,158 in total interest paid over the life of the loan.
Be Proactive: The best time to look at your credit is when you don’t yet need it. Don’t be surprised the next time you’re ready to finance a home or vehicle; prepare yourself (and your credit!) now to get the best possible interest rates later.