Credit score management has become more important than ever. Understanding your credit drivers can help you keep your score high.
Credit Scores have almost become a form of currency today. A separate industry has even been constructed around managing credit scores. With all of the information available, it has become easier than ever for consumers to access their score. Almost everyone knows the importance of their credit score, but not many people know what they can do to influence it.
What is Your Credit Score?
In most states every person is entitled to at least one free credit score per year from each reporting agency. There are three reporting agencies (Equifax, TransUnion, and Experian) in the US, which provide scores via an aggregator service. The aggregator essentially averages these three scores, providing you one single credit score. Typically, all three of these scores are very close because they have the same information. When something is put on your credit report, it goes to all agencies. The only difference is the method they use to calculate the actual score.
Building a Good Credit Score
Your credit score is based multiple factors. Everything starts with your income. The higher your income the more credit you can take on without a hit to your credit score. Additionally, higher income allows you to have more revolving credit outstanding without taking a hit to your credit score.
Another factor is the length of your credit history. In this case the longer you have history the better. One easy way to keep your score higher is to maintain old credit cards. Even if you want to move on, closing that account that has been open for five or ten years will affect your score negatively. It is best to keep a zero balance on this account, use it for one purchase every three or four months, and request your balance lower to the minimum allowable.
Credit Cards: How Many is Too Many
The other side of this is having too many credit cards. Credit card limits reflect the total amount of revolving credit available to you. The more credit you have available to you, the less credit you will be able to qualify for. All of this contributes to a lower credit score. Keeping two (three maximum) is the best way to go. Revolving credit includes department store cards, grocery store cards, gas cards, etc. Avoid signing up for cards that promise store discounts because that limit will be reflected on your credit score.
Avoid taking the automatic limit increases. There is no need to have a high credit card limit that you never come close too. Your emergency credit card should have a limit under $10,000. High limits negatively affect your score, so keeping track of them can keep your score higher.
Payment History
Paying bills on time makes you a less risky borrower. Everyone makes mistakes, so don’t expect that one payment you sent in three days late to show up on your score. Being chronically late; however, will ding your credit score. There is no magic number of late payments that gets you on the late payer list, but it takes more than one and less than five late payments (in a row). Some of this can be delayed by simply working with the company that you will be paying late. In the event of an emergency, calling your credit card companies and working out a plan you stick to can save you unnecessary dings on your credit score.
Applying for Credit
Too many applications will also ding your credit score, but not by much. Remember, your credit score enables you to get credit, so don’t go overboard avoiding all credit. When you do need to apply for credit, make sure all of the applications happen in a 30 day period. You only get one ding per 30 days because the companies expect you to use credit. This will not seriously affect your score unless you constantly apply for credit.
Check out this article on Credit Repair Tips if you have had some credit missteps.
