There are many advantages of having a good credit score, such as enjoying a lower interest rate on your credit cards and loans. A good credit score also allows you to save money on insurance and security deposits on new utilities and cell phone service. Using your credit wisely is what helps you to maintain a good score.
The more you know about what goes into your credit score, the easier it will be to maintain a good one. Five key pieces of information are used to calculate your credit score: your payment history, level of debt, credit age, mix of credit, and recent credit.
Some things do not affect your credit score. For example, checking account overdrafts and utility payments won’t automatically help (or hurt) your credit score.
That goes for all your bills, not just your credit cards and loans. While certain bills don’t get reported to the credit bureaus when you pay on time, they could end up on your credit report if you fall behind.
Even a small library fine could wind up on your credit report if it’s left unpaid and sent to a collections agency. Continue to pay all your bills on time to maintain a good credit score.
The higher your credit card balance in relation to your credit limit, the worse your credit score will be. Your combined credit card balances should be within 30% of your combined credit limits to maintain a good credit score. That’s $300 on credit cards with combined limits of $1,000.
Charging more than 30 percent of your credit limit is risky even if you plan to pay off the balance when your billing statement arrives. Card issuers typically report the balance when your statement closes, so that’s the number that will be reflected on your credit report. It’s a good idea to keep tabs on your accounts online and pay enough to reduce your balances to less than 30 percent just before the billing month closes.
When you close a credit card, your credit card issuer no longer sends updates to the credit bureaus, and the credit scoring formula places less weight on inactive accounts. After 10 years or so, the credit bureau will remove that closed account’s history from your credit report, and losing that credit history will shorten your average credit age and cause your credit score to drop.
Closing a credit card also reduces your available credit. For example, if you have three cards with a combined credit limit of $10,000 and you close one with a $3,000 limit, your combined credit limit will be reduced to $7,000. Since your goal is to keep your credit card balances at less than 30 percent of your available credit, closing that card reduces your threshold by $900.
Credit card balances aren’t the only accounts that influence your credit score. Loan balances and lines of credit also impact your level of debt. Having too much debt can cost you points on your credit score. The lower your debt, the easier it will be to maintain a good credit score.
Too many credit inquiries—whether they be for a credit card or a loan—also can have a negative impact on your score, so make sure you’re only applying for credit when it really is necessary. Opening a new credit account also lowers your average credit age.
Just because you do everything right with your credit doesn’t mean everyone else will. Errors could end up on your credit report leading to a drop in your credit score.
Identity theft and credit card fraud also can lead to inaccurate information on your credit report. Checking your credit report throughout the year helps you detect these mistakes sooner so you can correct them and maintain a good credit score.