Good credit is essential to achieving many of our other financial goals. Buying a home, financing a new car or returning to school almost always requires a bit of credit assistance.
Your credit score, also known as your FICO, is a sum of predictive analytics that tells how likely you are to pay your debt on time and how responsibly you use credit. Essentially, if you were good at paying your bills in the past, creditors are pretty sure you’ll exhibit that same behavior in the future, and that lowers their risk of extending you more credit. Credit bureaus place the most emphasis on your recent payment behavior, so making a concerted effort to tackle these tips can help improve your score.
1. Keep Balances Relatively Low
How much you’ve charged relative to your total available credit is a key factor in calculating your credit score. For example, if you have a credit card with a $5,000 limit and you’ve charged $1,500 on it, that’s a 30 percent credit utilization rate.
Most lenders recommend you keep a credit utilization rate of 30 percent or less. This is often calculated across all your credit lines. If you have a few open cards you don’t regularly use that have zero balances, they can actually help demonstrate purchasing discipline and up your score.
2. Pay Off Small Balance Cards
Part of your credit score is calculated by looking at how many cards you have with balances. If you’ve gotten in the habit of having many cards with small dollar balances, it’s probably worth focusing on paying those off. You’re better off picking just one or two go-to credit cards to use for your major purchases. Select those based on the best rate and offers for your personal financial situation.
This tip is also the beginning of the debt snowball payoff strategy cheered on by many financial professionals. Getting rid of the small debts you owe (oftentimes at higher rates) can give you that psychological boost to tackle bigger payments down the road.
3. Maintain Old Credit Lines
When you’ve handled debt responsibly over a long period of time, your credit score picks up. The longer you have a personal credit history, the better it is for your credit score. Thinking of closing that small dollar card you’ve had since high school? Think again. You may want to leave it open if you’ve had a solid repayment record, it’s a no-fee card and you’ve kept the balance low.
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