The following is a guest post from YFS, the owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances. Join YFS’s mailing list for straight forward easy to understand financial advice by clicking here.
Improving your credit score seems like it should be a fairly easy thing. Pay your bills on time, and you should have a good credit score, right? Well, that is not always the case. While it is always a good idea to pay your bills and to pay them on time, simply paying on time will not always guarantee a great credit score because other factors are involved.
Credit scoring is somewhat of a mysterious realm, and the people who score your credit are not letting the mere mortals in on their secrets. These people put your information into their system, and then they give you a number. The FICO score is the most common, and it ranges from 300 (bad credit) to 850 (excellent credit). Banks and other lenders check your credit score to determine your creditworthiness. Your credit score, in part, helps determine how much money a bank will lend you. This is important when you want to make a big purchase like a car or a house.
Due to the mystery surrounding credit scoring, it is not exactly clear what improves your credit score. Nonetheless, there are some general tips that are likely to improve your credit score, and many of them are good habits. Some of the following tips are good common sense, while others are less readily apparent. These tips will also be helpful if you want to repair your credit after a bankruptcy or want to have good credit to buy a foreclosure.
1. Number of Credit Accounts – In order to have a credit score, you have to have open lines of credit. This generally comes in the form of credit cards, and it is thought that having around five or six credit open credit accounts is best for your credit score. Anything you finance, such as a car or your college education, is a form of credit.
2. Balances and Limits – On one hand, just having open credit accounts is not the best way to improve your score—you need to have a balance on the credit account for it to be as useful as possible. So, while having an open credit account is good, having an active credit account (one with a balance) is better. On the other hand, having a balance on your account that is close to the limit (especially multiple balances that are close to the limit) is not good for your score.
3. Payments – As discussed, paying your bills is important. Late payments will negatively affect your credit score. So, you should be sure to pay everything, student loans, mortgages, etc, on time when possible. If you ever have trouble making payments, you should contact your credit company. For example, if you are unemployed, you can often defer your student loans for a time.
Also, if you do have late payments, their effect will be reduced over time. For example, late payments last year will be less important than late payments last month.
4. Credit Inquiries – Every time you have your credit checked, it will affect your score. However, this should not stop you from checking out a few lenders if you are preparing to buy a home, for example. Also, you checking your score on your own does not affect your score.
5. The Credit Score Killers – Certain things, such as tax liens, collections, multiple late payments, and foreclosures will kill your credit score. Bankruptcy will negatively affect your score for years.
The Bottom Line: The best thing for your credit score is to have multiple credit accounts with relatively low balances, to pay your bills on time, and to avoid the credit score killers.
Have you worked to improve your credit score? What did you do to improve your score?
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