Establishing a great credit score isn’t rocket science. But for so many Americans, it continues to be an elusive goal. If you dream of seeing your score hit the 850 mark, it’s going to take some time and work to get it there. In the meantime, you can commit to good financial practices. It’s important to start doing the following five things now if you want your credit score to climb.
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1. Pay Your Bills on Time
Credit scores are based on a number of different factors, but your payment history is the single most important one of all. It makes up 35% of your FICO score, which is the one that most lenders use when making approval decisions for things like credit cards, car loans and mortgages. Missing a payment here and there may not seem like a big deal, but it can seriously tank your score.
Late payments can linger on your credit report for up to seven years and the more you have, the worse the impact can be. Fortunately the weight of late payments diminishes over time so if you’ve had a few slip-ups in the past, you can undo some of the damage by staying on top of your bills going forward.
2. Don’t Close Old Accounts
The length of your credit history also plays a part in determining your score. The longer you’ve had an account open, the better. The age of each of your accounts is averaged together so when you close one that’s older, it’s going to make your history appear shorter.
Unless you’re being charged a big annual fee, it might make more sense to keep accounts open even if you’re not using them. If you’re worried about the creditor closing your card because of inactivity, you can get around it by making one or two small charges during the year and paying them off immediately and in full.
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3. Apply for New Credit Sparingly
Any time you apply for a loan or line of credit, it shows up on your credit report as a hard inquiry. Inquiries for new credit account for 10% of your FICO score and each time you apply, it may knock a few points off. Some exceptions to this rule are if you’re checking your own score or if you’re shopping around for a mortgage loan within a relatively short period of time (30 days). Keeping your inquiries to a minimum cuts down on the odds of inadvertently hurting your score.
4. Keep Your Balances Low
Your credit utilization ratio is the amount of your available credit you’re actually using compared to your credit line. Charging a lot to credit cards shrinks the ratio down, negatively affecting your score and making you appear to be a greater risk to lenders. Even if you’re not maintaining high balances on your cards, you can still hurt your score by closing old accounts or allowing someone to act as an authorized user on your account.
Related Article: How Closing a Credit Card Really Impacts Your Credit Score
5. Mix It Up
Credit cards, charge cards and loans all factor into your credit score calculation differently. Having a diverse blend of credit types can show lenders that you can handle a variety of obligations. If you only have one kind of debt, such as student loans, adding a credit card to the mix could help to balance things out and boost your score if you’re keeping up with your payments.
The Bottom Line
Maintaining excellent credit is really about exercising some common sense and knowing what mistakes to avoid. Sticking with these basic financial rules can get you on the path toward a better score regardless of where you’re starting from.
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