5 Ways to Maintain Good Credit
We’ve already gone over this, but again, the five key pieces of information used to calculate your credit score are:
- Your payment history
- Your amounts owed
- The length of your credit history
- Your credit mix
- New credit
Remembering these five components can help you make better decisions when it comes to building and managing your credit. So, let’s look at some practical things you can do to ensure you are addressing each of the credit score factors.
1. Pay your bills on time each month
Paying your bills on time is the best thing you can do to build a good credit score. Remember, your payment history makes up a whopping 35% of your credit score. So, by paying on time and avoiding any late payments, you’ll help yourself steer clear of bad credit.
For payments to be considered on time, you must make at least the minimum payment by your due date each month. Make it a goal to pay at least the minimum every month, but if you can afford to pay more, do it! Contrary to some credit myths out there, carrying a credit card balance month to month does NOT improve your credit score, and can often lead to interest charges. The best case scenario is to pay your credit card balance in full each month. That way, your payment history is spotless and you avoid paying interest.
2. Keep your credit balances low
The second most significant influence on your credit score is your overall level of debt. Credit scores take into account the total amount of debt you have, as well as your credit utilization.
Your credit score will suffer if you run up a big credit card balance without paying it off, not to mention the compound interest charges you will incur. Keeping your credit card utilization below 30% is ideal for building good credit. However, it’s always best to pay off any credits or outstanding debt in full when you can.
One of the best ways to always maintain a low balance is to make sure that you’re only using your credit card, or other types of credit when you need to, and that you’re staying on top of upcoming payment dates. If you’re especially worried about racking up your credit balance, pay it off as you go. Don’t wait until the end of the month. When you use your credit card for a purchase, pay it off immediately. That way, you always maintain a low balance.
3. Keep credit cards open
The length of your credit history has a smaller impact on your overall credit score than payment history and amounts owed, but it’s still nothing to sneeze at. When you close a credit card, the issuer will no longer send updates to credit bureaus, and the credit scoring formula will place less weight on inactive accounts. After ten years or so, the closed account’s history will be removed from your credit report. Once you lose that credit history, your average credit age will decrease and your overall score will drop. To maintain a lengthy credit history, keep lines of credit open, even if you’re not using them that much.
Closing a credit card will also affect your credit score because it reduces the amount of available credit you have. For example, if you had three cards that held a combined credit limit of $10,000, and you closed one with a $2,500 limit, your overall credit limit would be reduced to $7,500. Remember that your credit utilization goal is 30%, so by closing that card, you make it much easier to go over that threshold.
4. Build your credit with more than a credit card
Remember, credit cards are not your only way to build credit. You should mix up the types of credit you have, maintaining both installment accounts like auto loans and mortgages and revolving credit like credit cards and other credit lines. Maintaining different types of credit accounts demonstrates your ability to handle multiple payments. This reflects favorably in your credit score.
5. Check your credit score regularly
Your credit report can affect many parts of your life, so it’s highly recommended that you check your score regularly. The first reason to check your score is that you’ll know where you stand. Your credit score is an integral part of your total financial health. Whether you’re in good or bad standing, it’s much better to know your credit score than to have no idea how you’re doing. Remember that if your score is bad, there are steps you can take to improve it. On the flip side, if your credit score is positive, you can focus your energy on maintaining it.
When you build a free financial plan with Savology, you can get access to a credit score module that will help you analyze and manage your credit score.