For today, I have a guest post for you about how to maintain a good credit score. With credit scores, just as with everything else, it is your daily habits that take you to your end goal: a perfect credit score.
It may seem hard, but it’s not impossible. Baruch Silvermann from The Smart Investor has written down all the things that you need to know!
How To Maintain A good Credit Score?
You might say that getting good credit is an art but consumers often believe a lot of wrong notions on how to do it. For one, racking up a ton of credit card bills isn’t going to cut it. Nor will sending multiple credit card applications in one blast.
Your credit score, as the private companies that monitor your credit record determine, is a reflection of your ability to repay debts. And in the complicated world of finance, the more creditworthy a borrower is, the better offers and privileges he can get. Like lower finance charges, for example. Your FICO score tells it like it is. The higher it is, the more creditworthy you are in the eyes of lenders. Being so, they are more inclined to give you a less-than-average loan rate.
The good news is, achieving a perfect credit score is not an elusive dream – it is easier than you can imagine.
The FICO score begins with 300 on the bottom end and ends at 850 on the top end. But, do people actually get a perfect score of 850? Well, according to Fair Isaac Co., which developed the secretive FICO score, only one out of nine Americans gets a FICO score of 800 or higher. And only 1.2% of all FICO scores in America are perfect 850 scores. If you’re dreaming of getting a perfect score, one out of 100 is not exactly odd that’s going to work in your favor.
But attaining a perfect score isn’t as hard as you think it is. If you check your own FICO score, you might realize it’s higher than what you imagine it to be. Some consumers get the shock of their lives when they see that they are a point shy of getting a perfect score. And the amazing thing is this: these people did nothing extraordinary to propel their scores to that towering level. Most of them just followed five simple strategies and maintained a form of financial discipline. Eventually, they reaped great results.
1. Pay your bills on time
It’s an undeniable fact that the biggest component of getting an impeccable credit score is to pay your bills on time. When you pay your obligations on time, you send a message to the lenders that they can trust you with future loans. In fact, you make yourself a candidate for lower lending rates in the future. Lenders would not just give their business to borrowers with the highest credit scores but will fight to do it. It will give you more bargaining edge in working out a lower financing rate.
You should also remember that if you are consistently on time, one late payment might be something that your lender would be willing to forgive. Of course, it will depend on the lender’s policy, but most companies will allow a late payment once every 12 to 24 months without your score suffering a black eye. But you should explain to your lender why your payment was late and then catch up on your payment.
Don’t believe what others say about carrying a balance on your credit cards to get a higher score. It’s not true. Although your lenders love it when they are able to charge and collect interest off your balances, the credit bureaus just want to see if you are meeting your obligations in a timely manner (or not at all). Whether you pay your credit accounts in full each cycle or carry a little balance on your cards, you’ll get the same result.
If you have numerous bills with different due dates, here are some tips to help you pay them on time:
- Know every obligation: List all your obligations, along with their important details, such as the total amount, regular payments, the name of the creditor or vendor, and the due date. Then, analyze each credit account to specify the obligations you’re paying for. For example, if it’s for media subscriptions, gym memberships, utility bills, meal subscriptions, and more.
- Input the payment details into a calendar: Sometimes, you can get too busy and forget your financial obligations, so you’ll need something that can remind you of these deadlines, which is your calendar. You can use valuable calendar features like color coding, recurring events, and notifications to keep your payments in mind.
- Set up automated payments if possible: Using a calendar is a convenient way to pay your bills on time, but setting up automated payments is swifter and more hassle-free. Some service platforms can connect to your bank account and automatically deduct the bill amount on a set day of the month.
2. Assemble a good mix of credit accounts
The next thing you can do is try to have a good mix of credit accounts open at all times. Creditors keep an eye out if you can make your payments on time and if you can help not to overextend yourself. But aside from these things, they also want to check your ability to manage different types of credit accounts.
Credit agencies love consumers who have a good mix of installment loans (ex. mortgage, car loan), student loans, and revolving credit like a department store credit card, bank credit card, or cashback credit cards. If you have no trouble handling different types of debt obligations, it’s enough to convince creditors to lend to you. More than that, your FICO score will benefit from it.
Although having a plethora of credit cards increases your financial safety and credibility, it’s not a requirement to get every type of credit account, especially if you don’t recognize the need for one. Instead, you should practice management of your credit accounts, recommends Scott Langdon, Analyst for Compare Credit.
3. Keep your accounts active for a long time
You’ll do your credit score a good push by keeping your accounts open for a long time and in good standing.
Lenders and credit reporting agencies treat your account history as a report card to gauge your creditworthiness. For example, you may have a perfect payment history but if your accounts have just been in existence for six months, it may not be enough to get the nod of lenders. Some lenders may think twice about granting you credit because of the lack of a track record. On the other hand, if your average good-standing credit record has been going on for 10 years, that can be conclusive enough. It’s evidence to creditors and the credit agencies of your trustworthiness.
Here is a great tip: even if you are not often using a long-standing credit account, DO NOT close these accounts. Long-existing accounts extend the average length of your credit history, which is one of the factors that pushes or pulls your credit score. To keep your account active and in good standing, purposefully use all of your credit lines once or twice a year.
4. Keep track of your credit utilization rates
If you’re serious about getting a perfect credit score then you should keep your credit utilization rate in check. To find your rate, add up the total credit you have used and divide it by your aggregate available credit. If you get a percentage below 20% or 30%, you’re in the safe zone – if you ask the three credit reporting agencies.
Credit bureaus are not very comfortable with utilization rates that breach the 30% mark. It could imply that a person cannot manage his finances well or that he/she is finding it difficult to repay his/her debts.
When you manage your credit utilization well enough, you can welcome the credit line increases with open arms. Unless you’re a compulsive and impulsive spender, an increase in your credit line will hike your aggregate limit. If you don’t incur any additional debts, you’ll end up lowering your credit utilization rate. On the opposite end, if you reduce your credit line, you could increase your credit utilization rate.
5. Be careful of opening new accounts
Even if you can confidently manage multiple types of credit accounts, it pays to be cautious about opening too many accounts.
A good rule of thumb to follow is to ask yourself if it is absolutely necessary to open a credit account according to your needs. If we’re talking about buying a home, getting a car, providing a college education for your kid, or even purchasing a new washer and dryer for your home, then opening a line of credit may be a good option. A new credit account is okay for large-money purchases or events.
By following these simple strategies and keeping a disciplined financial life, you could achieve a perfect credit score of 850 after some time.
How long will negative information stay on my report?
If you have negative information on your reports such as collections and late payments, they will be on your credit report for seven years. However, for other specific public record information like Chapter 7 bankruptcies and unpaid tax liens, they will remain up to 10 years on your report.
Most negative information will lose its adverse effect on your record as time moves forward. However, it will be harder to recover if you have some serious delinquencies on your record. One or two missed payments are okay but charge-offs or collections will hurt you for a long time. A great recourse is to begin the process of improving your credit history as soon as possible and as fast as you can do it.
Getting a good credit score is much like taking care of your home. You have to regularly check and maintain it and do some general cleaning at least once every year. You should also keep an eye on your credit record. For a free annual report, click on this link. The federal law gives you the privilege to request and receive a free report once a year from each of the three major credit reporting agencies.
Author bio: Baruch Silvermann is a personal finance expert, investor for more than 15 years, digital marketer, and founder of The Smart Investor. But above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
Do you have additional tips to maintain a good credit score?
Marjolein is a financial consultant who has built over €4,000 monthly passive income and saves over 70% of her income. Read Radicals’ inspiring story, from stuck in the 9-to-5 to loving life. Feel free to send Radical a message at the bottom of this page