A good credit score is one of the many benefits, such as enjoying a lower interest rate on credit cards and loans. A good credit score also allows you to save money on insurance and security deposits for new utility services and mobile phone service. Understanding how the credit scoring system works and following these rules when you can will help you maintain a good credit score.
What Goes Into a Good Credit Score
Five key elements are used to calculate your credit score – your payment history, credit utilization ratio, credit age, credit mix, and new credit.
Paying Bills on Time
Making timely payments is important for all your bills, not just your credit cards and loans. Even if you are not using one of the third-party services that can report timely rent and utility bill payments to credit bureaus, the payment activity on those accounts could end up on your credit report if you are late. Continue to pay all your bills on time to maintain a good credit score.
Keeping Credit Card Balances Low
The higher your credit card balance relative to your credit limit, the worse your credit score will be. Your total credit card balances should be within 30% of your credit limits to maintain a good credit score – the lower, the better.
Not Closing Old Credit Cards
When you close a credit card, your credit card issuer does not send updates to the three major credit bureaus – Experian, Equifax, and TransUnion – which negatively impacts your score because the credit scoring formula gives less weight to inactive accounts. After about 10 years, the credit bureau will remove the history of the closed account completely from your credit report, and losing that credit history will shorten your average credit age and cause your credit score to drop.
Limiting New Credit Inquiries
Multiple credit inquiries – especially from a credit card issuer – can negatively affect your score. Applying for multiple credit cards in a short period can make you seem risky to lenders, although multiple inquiries for an auto loan or personal loan in a short timeframe are usually treated as one inquiry, as they often mean the consumer is looking for the best loan. Make sure to apply for credit only when necessary. Opening a new credit card account also reduces your average credit age.
Monitoring Your Credit Report
Just because you are doing everything right regarding your credit does not mean others will do the same. Errors in your credit report can occur, leading to a decreased credit score. Identity theft and credit card fraud can also result in inaccurate information in your credit report. Checking your credit report throughout the year helps you catch these mistakes early so you can correct them and maintain a good credit score.
Frequently Asked Questions (FAQs)
What is considered a good credit score?
Numbers can vary depending on the type of scoring system. The FICO score, which is most commonly used by lenders, ranges from 300 (very poor) to 850, which is typically considered excellent.
Are there any downsides to having a good credit score?
Having a good credit score is generally a good thing, but there is a possibility of using credit for purchases more frequently because it is available to you on good terms. This can mean paying interest and fees that you wouldn’t have if you had paid cash, and possibly overspending and hurting your credit score if you end up overextended and unable to keep up with payments.
How
Can I find out what my credit score is?
Your current credit score should be displayed on your latest credit card or loan statement. You can also purchase your score from credit reporting agencies. Be cautious of credit services that offer “free credit scores,” as some may require you to sign up for a monthly subscription for that “free” initial credit score.
Source: https://www.thebalancemoney.com/maintain-good-credit-score-960513
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