How to Maintain Good Credit
There are many benefits of having a good credit score, like 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. It's all about how you use credit that lets you to keep a good score. To maintain a good credit history, try practicing the following guidelines:
1. Know what goes into a good credit 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. But, not everything financial affects your credit score. For example, checking account overdrafts and utility payments won’t automatically help (or hurt) your credit score.
2. Pay your bills on time.
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. Continue to pay all your bills on time to maintain a good credit score.
3. Keep your credit card balances low.
The higher your credit card balance is, the worse your credit score will be. Your credit card balance should be within 30% of your credit limit to maintain a good credit score. That’s $300 on a credit card with a $1,000 credit limit. Charging more than 30% of your credit limit is risky even if you plan to pay off the balance when your billing statement comes. Card issuers typically report the balance when your statement closes and if that's a high balance; your credit score will be affected even if you subsequently pay your balance in full.
4. Manage your debt.
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 (30% of your credit score). Having too much debt can cost credit score points and make it difficult to afford your monthly payments. The lower your debt, the easier it will be to maintain a good credit score.
5. Limit your applications for new credit.
Each time you apply for credit – whether a credit card or loan – your credit score takes a small hit. Credit inquiries are only 10% of your credit score, but if you have a high credit score (say 800), you stand to lose a lot of points (10% of 800 is 80). Opening a new credit account also lowers your average credit age (15% of your credit score). To maintain a good credit score, you should open new credit sparingly.
6. Watch your credit report.
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 can also lead to inaccurate information on your credit report. Checking your credit report throughout the year lets you detect these mistakes sooner so you can correct them and maintain a good credit score.
Good credit definition
When it comes to your credit, it’s important to know how you stack up. Do you have good credit? Excellent credit? Poor credit? How can you find out?
Good Credit can be defined as a qualification of an individual's credit history that indicates that the borrower is a safe credit risk. An individual or entity with good credit poses little credit risk to a lender. Having good credit tells a lender that one is likely to make payments on time and that the risk of defaulting on a loan is small. Those with good credit are more likely to be approved for credit than those with average or bad credit. An individual with good credit will have a high credit score whereas an individual with bad credit will have a low credit score. An individual's credit history is dependent on a number of factors, including the amount borrowed, the amount of available credit remaining and the timeliness of payments. Credit rating agencies assign a score to an individual's credit rating, but this number may vary according to the methodologies used in calculating the credit score. Having good credit makes it easier to obtain loans, such as mortgages, and allows the borrower to obtain a more favorable interest rate. The most commonly used credit score is the FICO Score.
The importance of having good credit can’t be understated. From helping you get a loan, to qualifying you for a great job, good credit simply makes life easier and less expensive. In the eyes of lenders, employers, insurance agents, and a host of other people and entities, the state of your credit represents how responsible and even how ethical you are. For example, lenders look at your credit score to determine not only your ability, but your willingness to repay a loan. Insurance companies view an individual with a good credit score as someone who is trustworthy and less likely to commit insurance fraud. Even many employers run a credit check to determine if a candidate is likely to be a responsible employee. (However, it should be noted that employers only have access to a modified version of your credit report which omits some personal information including your account numbers and year of birth).
Your credit score is an extremely important part of your overall credit file, but it’s only one piece of the pie. Lenders, insurance companies, and some employers will place a lot of weight on the health of your credit when determining your worthiness. However, other factors also come into the decision-making process. If you have good to excellent credit, make sure that you take the necessary steps to protect it by repaying your loans on time each month, refraining from obtaining more debt than is necessary, and keeping your other bills paid on time to avoid collections accounts. Bad credit can prevent you from being able to purchase a home, work in certain industries, and will wind up costing you a bundle in higher interest rates and fees. However, if you understand what hurts your credit score, you can make an effort to fix bad habits and improve your credit rating.
How to Build Good Credit
Building credit can be tricky. If you don’t have a credit history, it’s hard to get a loan, a credit card or even an apartment. But how are you supposed to show a history of responsible repayment if no one will give you credit in the first place? To have a FICO score, for example, you need at least one account that’s been open six months or longer, and you need at least one creditor reporting your activity to the credit bureaus in the last six months. Several tools can help you establish a credit history: secured credit cards, a credit-builder loan, a co-signed credit card or loan, or authorized user status on another person’s credit card. Whichever you choose, make sure you use it in a way that will eventually earn you a good credit score.
Clearly it’s best to avoid those things that can have a negative impact on your credit rating in the first place. Here are some of the things that may affect it:
- Having a High level of existing debt. Banks and credit card companies may be nervous about lending you more if you’re already over stretched.
- Missing or making late payments on anything from your mortgage, credit card, personal loan, gas or electricity bills will stay on your credit file for six years.
- If you get a county court judgment (CCJ) (called a decree in Scotland) for an unpaid bill this will have a serious impact on your credit score. CCJs stay on your file for six years.
- Applying for lots of credit at once. When you apply for credit it shows on your credit report so it’s better to stagger applications. If you just want to compare rates, find out whether the lender can register a ‘quotation search’ on your credit report instead of a ‘credit application search’. Lenders know that quotation searches don’t represent actual credit applications, so they won’t have a negative impact on your credit rating in the future.
- Open credit cards accounts that you never use. Lenders will look at how much credit is available to you, not just how much you’re actually using.
- Mistakes on your credit report, which lenders check as part of the credit score process. If something on your credit report is incorrect or doesn’t apply to you – i.e., someone may have fraudulently applied for credit in your name without you knowing – contact the credit reference agency immediately to have this investigated and removed.
- Not being on the electoral register. This is used by lenders to verify that you are who you say you are.
- Moving from one place to another frequently. Lenders feel more comfortable if they see evidence that you have lived at one address for some time.
- Being tied into any joint form of credit such as bank accounts, loans or mortgages with someone with a poor credit history, known as ‘financial association’, as this will affect your ability to gain credit.
Building a good credit score takes time, probably at least six months of on-time payments. If you practice these good credit habits to build your score, you will be able to show that you are creditworthy. Here are things you could do to build your score with good habits:
- Make 100% of your payments on time, not only with credit accounts but also with other accounts, such as utility bills. Bills that go unpaid may be sold to a collection agency, which will seriously hurt your credit.
- Keep your credit card debt low. We recommend paying your balance in full each month, but if do you carry a balance from month to month, don’t let your debt balance exceed 30% of your credit limit.
- Avoid opening too many new accounts at once; new accounts lower your average account age, which makes up part of your credit score.
- Keep accounts open for as long as possible. Unless one of your unused cards has an annual fee, you should keep them all open and active for the sake of your length of payment history and credit utilization.
- Check each of your credit reports annually for errors and discrepancies.