In my last article I shared a story about the importance of attention to your credit history. It impacts not just matters of credit, but it will also dictate the rates you pay for auto and homeowner’s insurance, and will be scrutinized by potential employers.
Your credit rating is most represented by your credit – or FICO score. It can from 300 – 850. Scores above 750 are considered excellent, and below 650, are poor.
So what can you do that’s relatively painless, to help your credit score?
1. Check your credit report. You can order a free credit report from one of the three agencies each year at www.annualcreditreport.com . Do it – and be sure to correct any inaccuracies – almost everybody’s credit record has them, and this alone can boost your score substantially.
2. Pay your bills on time. Only “credit” related bills count toward your credit score. So if you must make a choice – pay the credit card before the gas bill – at least from a credit score perspective. Timely payments account for 35% of your score – so pay on time, even if you have to pay less than the full bill.
3. Watch your “Credit Utilization.” If you have a card with a $5,000 line, and your average balance is $1,000 – you’re using 20% of your available credit. Optimal utilization is 7%. One trick to lower utilization without changing your charging habits, is to make a payment on to your credit cards between cycles – say every two weeks. It won’t cost you more – but it will lower your utilization ratio and could improve your score – of which “utilization” is a 30% factor.
4. Age Matters. Aged accounts beget a higher score than newer accounts. So consider keeping older accounts – even if you don’t use them often. Similarly, avoid adding new accounts regularly. Space the addition of new accounts out so they don’t negatively impact the “average age.” Account age makes up 15% of your credit score.
5. Inquiries Matter. Too many inquiries (i.e. credit applications) will lower your score. This is not the case when they are clustered (as in applications for a car loan or mortgage). But for credit cards, inquiries and their timing will impact 10% of your score. So don’t spend a day at the mall, and open up a credit account at every store you visit.
Just as you change the oil in your car so it serves you more reliably, your credit record must be maintained too. I hope these tips help.