Taking good care of your credit score can be vitally important – especially if you’re planning on applying for major financing in the future – but how to do so isn’t always commonsense. Most people know that paying your bills on time is a major factor in maintaining a strong score, but the other elements are far less obvious. When just a small shift in your score can affect the cost or terms of the loan you qualify for, it’s crucial to know the ins and outs of the system. Here are some tips to make sure your credit score stays in tip top shape.
1. Don’t carry a high balance on your credit cards
Your credit card issuers may be more than happy to let you use most or all of your credit limits, but your credit score may suffer as a result. 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 yours is above 30%, it may be harming your credit score. There are several ways to avoid this: request credit limit increases on your cards, spend less 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 score will improve accordingly.
2. Avoid “hard pulls” on your credit report
Many borrowers would be surprised to learn that something as harmless as opening a savings account could damage their credit score, but it’s true. Opening a bank account or requesting a line of credit or loan from a financial institution usually involves them first checking 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 ding to your credit score that may last for as long as two years. Normally, these small and temporary hits to your score aren’t cause for alarm, but if you’re planning to apply for a major loan in the near future, a hard pull or two 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.
3. 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 actually harm your credit score in certain circumstances. The longer you’ve had your credit accounts, the better it is for your score, 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 score in the short term. Especially 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.
4. Don’t swear 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 a lower score. As mentioned above, a long credit history contributes to your credit score but so does a broader 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 score. Unless you have issues with compulsive spending, maintaining credit cards and using them responsibly is usually in your score’s best interest.
5. Check your credit history regularly
Did a financial institution make a mistake that adversely affected your credit? It may not be your fault, but if you don’t catch and correct it, you could be stuck with the consequences. 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 or missed payments. Once a year, it’s a good idea to check your credit reports with the three credit agencies (Equifax, TransUnion and Experian) to ensure that they are correct. Thanks to government mandate, these reports are available to you for free once a year at www.annualcreditreport.com. Be sure not to use any other site or enter any payment information unless you want to purchase additional services – your reports are guaranteed to you for free under law. If you do find any errors, follow the directions from the agencies to submit a correction.