Good credit scores can be an important asset, especially if you’re planning on applying for major financing like a mortgage in the future. With strong scores, you can often qualify for more financing options and borrow at lower costs. How to obtain and preserve high scores isn‘t necessarily easy or obvious, though. Here are six tips to follow to help build and maintain great credit scores.
- Pay your bills on time
This is an important one. To avoid taking a big ding to your credit scores, always make at least the minimum required payments on all your bills. If you anticipate being unable to make a payment on time, try contacting the biller before your payment is due to ask for an extension or another arrangement. If you can maintain sufficient funds in your bank account to pay your bills, considering setting up the autopay feature where available so you don’t forget these payments. Late payments and other negative marks may remain on your credit history for as long as seven years, so getting this right is crucial.
- Don’t carry high balances on your credit cards
Even if you pay off your credit card bills in full each month, running up high balances has the potential to harm your credit scores. The combined balances across all your credit cards compared to your combined credit limit across all your cards is known as your “credit utilization ratio”. If your ratio is above 30%, it may be harming your credit scores. There are several ways to avoid this: request credit limit increases on your cards, decrease your balances or open additional cards (see caveats below). Thankfully, unlike other credit factors, credit utilization has no “memory” – as soon as the issue is corrected, your scores will improve accordingly.
- Avoid “hard pulls” on your credit report
Even something as innocent as opening a savings account could potentially put a temporary ding in your credit scores. Opening a bank account or requesting a line of credit or loan from a financial institution usually involves an inquiry into your credit history. This can be done with either a “soft pull” or a “hard pull”. A hard pull must be authorized by you, and it also results in a small and temporary reduction of your credit scores that may last for as long as two years. Normally, these minor hits to your scores aren’t cause for alarm, but if you’re planning to apply for a major loan in the near future, multiple hard pulls could affect the terms of your loan. Therefore, if you have borrowing plans on the horizon, avoid opening any unnecessary new credit, and ensure any credit reports you agree to (such as for bank products, rental agreements, etc.) do not involve any hard pulls.
- Be careful closing and opening credit accounts
Cancelling a credit card and cutting it up is a classic example of financial liberation, but it could harm your credit scores in certain circumstances. The longer you’ve had your credit accounts, the better it is for your scores, and the newest, oldest and average ages of your accounts are all considered. Therefore, cancelling your older cards or opening new ones can both drive down your scores in the short term. As mentioned before, having fewer credit cards could also increase your utilization ratio, which may harm your scores further. If your older cards don’t have annual fees, it’s usually worth hanging on to them – and avoiding opening any new credit – at least until you know a new loan isn’t in your near future.
- Avoid swearing off credit cards altogether
In one of the bigger apparent ironies of credit score logic, the seemingly responsible act of avoiding credit cards altogether can in fact result in lower scores. As mentioned above, a long credit history contributes to your credit scores but so does using a broad variety of credit products. Having at least one credit card can help with both, and as one of the few credit products that can be 100% free if used responsibly, credit cards can be a long-term boon for your scores. Unless you have issues with compulsive spending, maintaining credit cards and using them responsibly is usually in the best interest of your scores.
- Check your credit reports regularly
Did a financial institution make a mistake in one of your credit report? Has someone stolen your identity and opened a credit account or loan in your name? If you don’t regularly check your credit reports, you may never notice, and if these discrepancies aren’t corrected, they could harm your scores. Not to be confused with a credit score, a credit report is the detailed history of your credit, including any derogatory marks such as late payments. It’s recommended to access your credit reports at least once a year to check for and report any inaccuracies. Click here to learn how to do so for free.