A recent report from Bankrate shows just how little many people know about credit scores, and what moves them up and down.
The report was based on a survey, in which four in five responders (77%) that carrying high outstanding balances on credit cards would hurt their credit score – even when they paid their bills on time.
In fact, Bankrate found that 55% of Americans think that they should carry balances on their credit cards in order to improve their scores.
Even more of them (76%) were unaware that closing accounts lowers their credit score. Also, 37% of U.S. adults were unaware that a credit card payment more than 30 days late would show up as a negative account on their credit report — even if the bill is later paid in full.
These kinds of misconceptions cost Americans billions of dollars each year. Worse yet, acting on bad information about credit cards and credit scores can cost you for many years to come, in the form of negatives on your credit report that drag your scores down.
So, in the interests of offering up a handy reference, here are the factors that impact your credit score:
Credit Card Utilization: This refers to how much of your available credit you are using. The overall utilization rate – on all your accounts — is the most important measure, but you should also be careful not to use too much of the available credit on any one account.
Using too much at any given time will really hurt your score. So, how much is too much? Credit bureaus consider 0-9% to be excellent, while using 10-29% of your available credit is considered “good.” Using 30-49% is “fair” while using 50-74% is considered “poor.”
Use more than 75% of your total available credit, and you are considered “very poor.”
There are two ways you can improve your credit utilization rating:
The best way is to pay down your balances, and be careful never to let them exceed 9% for any length of time.
Another way you can ramp up your score is to get higher credit limits – either by opening new accounts or asking for existing creditors to raise your credit limits.
By now you should have figured out why it can be a bad idea to close a credit card account: doing so will immediately lower your overall credit limit, and increase your level of credit card utilization, (assuming you are carrying balances).
You should always pay your bills on time. Do what you have to do to make sure you pay on time, since payment history has a huge – and lasting – impact on your credit score. If you pay even one card late, it will show up on your credit report.
Now, we all know that life isn’t always kind when it comes to timing, and money. Often, we are waiting on a payment from someone right at the time our bills come due.
By far the best option for paying your bill on time is to use online billpay.
But be careful, though: some credit card companies charge extra for “expedited” payment services. It’s never fun to pay extra for the privilege of paying money to someone else, but needs must. If your other option is to be late with your payment, use the expedited service.
Remember, being even one day late with your credit card payment is costly. It will cost you a penalty fee and you’ll have a derogatory mark on your credit report that may cause you to be to pay more for future credit you may need.
These can include open collections, paid-off collections, bankruptcies, civil judgements or tax liens.
Age of Credit History:
Here’s one that you don’t have too much control over. But the fact that it counts toward your score is a good incentive to start building your credit history at a young age, and maintaining it throughout your adult life.
More is better, believe it or not. People who have fewer than 11 total credit accounts are considered “poor” in terms of total accounts. Having 11-20 is “good” while having more than 21 is considered “Excellent.”
You should aim for a diversity of credit accounts, too. Having a car loan in addition to your credit cards will help; having a mortgage will help even more.
This is one of those factors that can really sneak up on people, and is often misunderstood.
When you apply for credit, the company you apply with will almost always check your credit score, and/or pull one or more of your credit reports. This is considered a “hard pull,” and it shows up on your credit reports almost immediately.
Having one or two of these hard pulls a year won’t have too much impact on your scores. However, having multiple hard pulls in a short period of time most certainly will. While it may be tempting to “test the waters” from time to time – (just to see if you can get qualified for a really good rewards card, for instance) – the cost of doing so may be a severely diminished credit score.
Too many inquiries in too short a time looks like “credit shopping” to the credit bureaus. This is something people do when their financial situation turns takes a turn for the worse. It is a red flag.
One caveat to all this: the credit bureaus, (and FICO), realize that when you are shopping for a specific type of loan (such as a car loan or a mortgage) you may have numerous inquiries over a short period of time. That’s usually OK, since the software they use is programmed to allow for this type of loan shopping.
Now you know how various things impact your credit score. Hopefully you can use this information to build your score in the near future.
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