If you haven’t heard it before, we’ll let you in on a secret. Having and maintaining a healthy credit score is important. Not only will good credit allow you to eventually achieve big dreams like purchasing a home or buying a car but it is also a vital asset to everyday life. Whether you’re currently in a credit hole or are just starting out financially, here are some tips to help you repair and uphold your credit score.
A person’s payment history is the most influential factor (accounting for 35%) when determining a credit score. For a healthy credit score, it is imperative that you:
- Pay your bills on time
- Ensure your account is current and keep it that way. If you are currently behind, it is crucial to make all of your outstanding payments. Recent late payments will have a greater (negative) impact on your credit score at first, but in time they will be less influential
- Resolve any collection accounts that are on your credit history. A collection account can be the single most damaging influencer when it comes to derogatory reporting and can still reflect a balance even if you have previously paid the account in full. Having your report updated may result in a substantial improvement in the credit file
- Prioritize your payments. Certain kinds of debt are deemed to be more important or influential than others. These accounts seem to carry more weight when calculating scores. A late payment on a mortgage, for example, is far more damaging than a department store credit card. Follow the “unofficial hierarchy of debt” below when prioritizing payments
- Home Mortgage
- Student Loan
- Installment Loan/Lease Payment
- Major Credit Card
- Department Store Credit Card
- Finance Company Debt
- Remember that closing an account will not remove its history from your report. The information will remain on a report for at least seven years
- Keep balances low on credit cards and other “revolving credit” as balances of accounts are responsible for approximately 30% of your credit score. High outstanding debt can negatively affect your score
- Pay off debt rather than move it around. The most effective way to improve your credit score in this area is by paying down your revolving credit. In fact, owning the same amount but having fewer open accounts may lower your score
- Avoid closing unused credit cards as a short-term strategy to raise your score
- Avoid opening a number of new credit cards that you don’t need just to increase your available credit. This approach could backfire and actually end up lowering your score. The length of credit history is responsible for around 15% of your score, so opening new accounts will also lower the average age of your existing accounts
- Shop around for financing but only over a short period of time. Credit scoring is able to differentiate between a search for a single loan (a car or mortgage for example) and a search for multiple lines of credit (credit cards and department store lines of credit)
- Do not overextend yourself. Having in excess of 5 revolving credit card type accounts can have a negative effect on credit scoring. Having a small amount of credit, however, can also have negative influence as it may be viewed as inability to obtain and/or maintain credit.
If you’d like any additional information on the subject, please visit www.annualcreditreport.com. If you have any questions or concerns regarding your finances, please contact me today so that I can be of further assistance to you.