MONEY BUCKET

Maintaining a Good Credit Score

Credit Score Matters: A Guide to Maintaining a Healthy Financial Reputation

Your credit score is a critical factor that affects various aspects of your financial life. From the interest rate you receive on a loan to the chances of landing your dream rental property, your credit score can make or break financial opportunities. In this article, we’ll dive into what credit scores are, how they’re calculated, and most importantly, how to maintain a good credit score.

What is a credit score?

A credit score is a three-digit number that represents your creditworthiness and is calculated based on your credit history. It ranges from 300 to 850, with a higher score indicating that you’re a lower risk borrower and more likely to make payments on time.

What factors influence your credit score?

Payment history

Payment history is the most significant factor that affects your credit score, accounting for 35% of your total score. Late or missed payments, collections, and bankruptcies can all have a negative impact on your score.

Credit utilization

Credit utilization, which is the amount of credit you use relative to your credit limit, is the second most significant factor that affects your credit score, accounting for 30% of your total score. Keeping your credit utilization low is key to maintaining a good credit score.

Credit history length

The length of your credit history also plays a role in determining your credit score, accounting for 15% of your total score. A longer credit history can demonstrate a track record of responsible credit use and boost your credit score.

Credit mix

The mix of credit you have, such as credit cards, car loans, and mortgages, can also impact your credit score, accounting for 10% of your total score. Having a diverse mix of credit can demonstrate that you can handle various types of credit responsibly.

New credit

Finally, new credit, such as applying for multiple credit cards or loans, can also affect your credit score, accounting for 10% of your total score. Opening new credit accounts can lower your average credit history length and increase your credit utilization, both of which can negatively impact your credit score.

How to maintain a good credit score

Pay bills on time

Pay all of your bills on time, every time. Late payments can remain on your credit report for up to seven years and have a significant impact on your credit score. Set up automatic payments or reminders to help ensure you pay on time.

Keep credit utilization low

Keep your credit utilization low by only using a small portion of your available credit. Aim to use no more than 30% of your credit limit, and lower is even better.

Avoid opening too many new credit accounts

Avoid opening too many new credit accounts at once, as this can lower your average credit history length and increase your credit utilization. Each time you apply for credit and your credit history is checked it can lower your personal credit score temporarily.

Check your credit report regularly

Check your credit report regularly to ensure that the information it contains is accurate and up-to-date. Dispute any errors that you find with the credit bureau, as correcting them can improve your credit score.

Diversify your credit mix

Having a diverse mix of credit, such as credit cards, car loans, and mortgages, can demonstrate that you can handle various types of credit responsibly and boost your credit score.