What Affects Your Credit Score?

Maintaining a high credit score is essential as it is the determining factor when apply for a loan, mortgage, or credit card. Unless you make all of your purchases with cash, managing your credit score is one of your most important financial activities. Not only does your credit score allow you to access financing, but it also determines your rate. Keeping your credit score high can save you thousands of dollars on every loan you take out. How do you keep your credit score high? By knowing the determining factors that influence your score. If you effectively manage these five categories, you will keep your credit rating high and your interest rates low.

Your Payment History for Loans, Mortgages, and Credit Cards One of the most prominent activities that influences your credit score is your ability to pay your bills on time. Although a late payment used to have a much stronger impact on your credit score than it does today, every late payment can negatively impact your credit rating. If you frequently run late on paying your bills, it will certainly reflect on your credit score. If you plan out your purchases intelligently, and make sure to only borrow for items that you can afford, you shouldn’t have to worry about not having enough money to pay your bills. Additionally, by scheduling your bills to be paid automatically, you will never have to worry about late payments due to accidental slipups. Pay your bills on time, and your credit score will remain high.

Your Debt to Available Debt Ratio Although this is important with all financial accounts, it is most important when dealing with credit cards. It is preferable to use 35% or less of your maximum credit limit. If you regularly have a credit card balance that’s 80% of your limit, it will negatively affect your credit score. The obvious solution for eliminating this risk is to pay off your credit cards regularly. Online payments make it possible to pay off your credit cards several times throughout the month. Therefore, if you find your credit debt mounting one month, consider transferring funds from your bank to keep the limit low. Despite what many people say about putting all your debt on one credit card, it is actually better for your credit score to spread your debt across several cards – keeping the debt to available debt ratio as low as possible for each card. Of course, if you do place your debt on multiple cards, make sure that you follow through with all necessary payments.

The Age of Your Financial Accounts Your credit score improves as you develop a credit history. Having financial accounts and credit cards for longer than 7 years reveals that you are capable of handling credit effectively. This positively reflects on your credit score. Therefore, if you decide to stop using a card, rather than close the account, simply pay it off and keep the account open to continue improving your rating (provided that the card has no annual fee).

The Frequency of Inquiries on Your Credit Score The only time that your credit score is checked is when someone is determining if doing business with you is a good idea. If a significant number of people are pulling up your credit score on a regular basis, it suggests that you may be borrowing a lot of money – which will lower your credit score. Fortunately, to compensate for large purchases, all mortgage inquiries done within a one month period count as just one inquiry. Additionally, auto loans have a fourteen day inquiry limit. This gives you the freedom to find the right loan when purchasing a house or car without it having a significant impact on your score. To ensure the safety of your credit score, avoid opening credit cards and store credit cards on a regular basis. Having 2-4 cards is acceptable, but if you open a new card every month it will hurt your score.

The Type of Debt You Hold Installment debts are viewed more positively than revolving debt. Installment debts include loans and mortgages, while revolving debt is primarily credit card debt. Owing $100,000 on your credit card will hurt your credit score a lot more than owing $100,000 on a house mortgage. Therefore, if your credit score may be in jeopardy, consider finding ways to transfer debt from revolving credit to installment plans. By regularly monitoring your own credit score, paying off your bills on time, and taking on new debt cautiously, you will have no problem maintaining an exceptional credit score.