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Your credit history reflects how you’ve managed debt in the past. And that history shows up in your credit score—a three-digit number that summarizes the information in your credit report.
Creditors can use that score to determine creditworthiness and when setting the terms of loans, including mortgages. And landlords may use it when you apply for an apartment. So maintaining a good credit score can have a big impact on your financial future.
Steps to Maintaining Your Credit Score
A good credit score depends on using credit responsibly over time. Here are a few tips from the Consumer Financial Protection Bureau (CFPB) to help keep your score up:
1. Pay Your Bills on Time
Paying your credit card bills and other loans on time is important—especially since a history of late or missed payments could cause a dip in your credit score.
If you’re concerned about missing a due date, features like automatic bill pay can help you stay on top of your account payments.
2. Stay Below Your Credit Limit
Try to keep your credit utilization ratio low by not using up all of your available credit.
According to the CFPB, experts recommend keeping your credit utilization below 30% of your available credit.
3. Maintain Credit History With Older Credit Cards
Account history is another factor in your credit score. So the longer you show good credit habits, the better it could be for your score.
Closing a credit card account can increase your credit utilization rate, since it reduces the amount of credit you have available. Plus, depending on the age of the account, it could reduce the length of your credit history. And both these factors could lower your score. Keep in mind that a card issuer may also choose to close a credit card account for reasons like low usage.
4. Apply for New Credit Only as Needed
You may want to consider what credit you need before applying for a new card. Multiple credit applications in a short period of time could have a negative impact on your score.
If you’re unsure whether you’ll be offered a card, some lenders offer a pre-approval option. That includes Capital One. You can see whether you’re pre-approved for some cards with no impact to your credit score, and it only takes a few minutes.
5. Check Your Credit Reports for Errors
Proactively checking your credit report for errors is another way to help maintain a good score. You may be doing everything right, but others may not. And errors can potentially hurt your credit scores.
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Credit history usually begins after high school, when young adults take on the burden of student loans and credit cards. This is a fantastic way of beginning a consumer credit history the right way. Student loans have lower interest rates than standard unsecured loans, and you can usually defer payments until after you graduate from college. These payments are small, and the repayment plan can last as long as fifteen years. This is a perfect way to set up a history of on-time payments. Credit cards with low balances are another good way to establish credit.
The issue that most people run into is how to maintain a good credit rating throughout their lives. The best rule is to pay all debts on time. If a payment on a particular loan or line of credit falls behind, take care of it as soon as you are aware of the problem. Common mistakes that bring down credit scores include delinquent payments and payments that have gone to collections. A person who realizes there is a missed payment, but puts off paying it, is risking the debt growing larger.
Delinquent payments are those that are 30 days, 60 days, and 90 (or more) days past dues. Delinquent payments hurt credit history, because they tell other potential lenders that you have a high risk for defaulting on loans. If left unaddressed, your debt can go to collections. Letting a debt go to collections means that you defaulted on that debt and it can cost you a lot of points because it represents 35 percent of your credit score (600*0.35 = 210 points).
Maxing out credit cards is another mistake people make. When you are issued a credit card, it comes with a maximum line of credit. The best rule is to only borrow up to 30 percent of that maximum amount at one time before paying it off. Do not keep borrowing against the card until you owe 75 percent or more of the available balance. This reflects poorly on your ability to manage debt, and it will also lower your credit rating.
If spending is a problem, take the credit card out of your wallet and leave it in a secure place. By not having physical access to the card, you have to think about purchases and how they will affect your financial position. Make a budget and factor in the level of credit payments you can tolerate. If you know you can only handle payments on $2,000 of credit card debt, don’t go over that amount.
In the event that you do miss payments or let a bill go to collections, you can repair your credit. It is important to pay off missed payments and take care of bills that have gone to a collections company. Next, it is time to come up with a plan to pay down your current debt. Prioritize the payments by determining which credit card or loan has the highest interest rate, and then pay off that one first. The higher interest rate loan or credit will drain your finances the most. Also, stop applying for new credit. New credit means more debt that you don’t need. It also lowers your credit score by increasing your number of credit inquiries (10 percent of score) and decreasing your credit history average age (10 percent of score).
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