Know What Goes Into a Good Credit Score
Five key pieces of information are used to calculate your credit score—your payment history, credit utilization ratio, credit age, mix of credit, and new credit. Unfortunately, the credit scoring system does not always accurately portray a person’s lending risk, especially for those with lower incomes, many of whom are people of color. Current scoring models have been criticized for perpetuating bias inherent in the financial system by, for instance, incorporating mortgage payments but typically not rent, which works against racial minorities who have not been able to enjoy homeownership at the same rate as White people because of redlining. On the bright side, there are now services like Experian Boost, which allow consumers to have utility payments recorded on their credit reports. Other services can get your rent payments onto your credit report. Lenders might use a credit score that doesn’t work with these services, so you still need to pay attention to the way traditional scoring systems work in order to maintain your good credit score.
Pay Your Bills on Time
On-time payments are important for all your bills, not just your credit cards and loans. Even if you’re not using one of the third-party services that can get your timely rent and utility bill payments reported to the credit bureaus, payment activity on those accounts could end up on your credit report if you fall behind. Continue to pay all your bills on time to maintain a good credit score.
Keep Your Credit Card Balances Low
The higher your credit card balance in relation to your credit limit, the worse your credit score will be. Your combined credit card balances should be within 30% of your combined credit limits to maintain a good credit score—and the lower, the better. Charging more than 30% of your credit limit is risky even if you plan to pay off the balance when your payment is due. Card issuers typically report the balance when your statement closes, so that’s the number that will be reflected on your credit report. It’s a good idea to keep tabs on your accounts online and pay enough to reduce your balances to as close to $0 as possible just before the billing month closes.
Don’t Close Old Credit Cards
When you close a credit card, your credit card issuer no longer sends updates to the three major credit bureaus—Experian, Equifax, and TransUnion—which hurts your score because the credit scoring formula places less weight on inactive accounts. After 10 years or so, the credit bureau will remove that closed account’s history from your credit report altogether, and losing that credit history will shorten your average credit age and cause your credit score to drop. Closing a credit card also reduces your available credit. For example, if you have three cards with a combined credit limit of $10,000, and you close one with a $3,000 limit, your combined credit limit will be reduced to $7,000. Since your goal is to keep your credit card balances at less than 30% of your available credit, closing that card reduces your threshold by $900.
Limit Your Applications for New Credit
Too many credit inquiries—especially from credit card issuers—also can have a negative impact on your score. Applying for multiple credit cards in a short period of time can make you look risky to lenders, though multiple inquiries for a car loan or personal loan in a short period are treated as a single inquiry, because often they just mean that the consumer is shopping around for the best loan. Make sure you’re only applying for credit when it really is necessary. Opening a new credit card account also lowers your average credit age.
Watch Your Credit Report
Just because you do everything right with your credit, it doesn’t mean that everyone else will. Errors could end up on your credit report, leading to a drop in your credit score. Identity theft and credit card fraud also can lead to inaccurate information on your credit report. Checking your credit report throughout the year helps you detect these mistakes sooner so you can correct them and maintain a good credit score.
