Your credit score matters.
Maintaining a healthy credit score remains important for several reasons. Strong credit scores translate into lower monthly interest rates on credit cards and consumer loans. Many employers review job candidate credit scores, as do apartment and condominium owners. How to keep a healthy credit score starts by performing research into your credit inquiries to see where you stand as a potential employee, homeowner, and bank customer.
Credit Inquiries 101
Credit inquiries are either “hard” or “soft,” with hard credit inquiries influencing your FICO score. Businesses make hard inquiries to review your credit history. Moreover, hard inquiries adversely affect your FICO score within a 45-day window of applying for a mortgage, car loan, student loan, and lines of credit to purchase goods and services.
Here are some of the hard credit inquiry factors that can decrease your credit score:
- Number of recent hard credit inquiries
- The number of accounts opened recently
- Type of credit accounts
- Amount of time since hard credit inquiries
If you want to maintain a healthy credit score, you should limit the number of hard credit inquiries. Applying for a mortgage, car loan, and multiple lines of credit within 45 days reduces your credit worthiness in the eyes of lenders.
Now, let’s review five other ways to keep a healthy credit score.
Timely Bill Payments
Every bill that you receive presents a due date. Far too many consumers pay off credit card bills on time, while neglecting to make timely payments on utility bills. Timely bill payments represent one of the most effective ways to maintain a healthy credit score. However, you have to develop a bill paying system based on meticulous organization of your bill statements, preferably by using a simple, yet accurate software program. If you want to go old school, organize your bills in the order of due dates. Automatic bank account withdrawals give consumers the peace of mind knowing they stay on top of bill payments.
Pay What You Owe…and then Some
How do lenders profit off lending you money or opening new lines of credit for you? They silently hope you only pay the minimum monthly amount due. This is especially true for large loans, such as far a car or home. You can pay what you owe each month and remain in the good credit graces of your FICO score. Yet, you can achieve even stronger credit by paying off more than what you owe each month. One of the keys to maintaining healthy credit involves ensuring your credit card balances remain low. All of your credit card balances should be within 30% of your credit limits to keep a healthy credit score.
Keep Old Credit Cards Open
This might appear to be a bit odd, considering we already discussed minimizing credit inquiries to keep a healthy credit score. Even if you no longer use a credit card, you should still keep it open because your creditors continue to send credit updates to the three major credit bureaus. When an issuer of a credit card stops sending credit reports, the credit scoring formula penalizes you for having one or more inactive credit accounts. After 10 years, credit card issuers remove any proof of the credit, which reduces your average credit age and thus, hurts your credit score.
Stay on Top of Your Debt
Remember that loan balances and lines of credit also factor into the less than 30% rule. The only way to ensure you never exceed 30% of your available credit involves taking the time and making the effort to manage debt. This doesn’t mean cutting up credit cards that approach the credit limit. It means analyzing your debt on a regular basis. When you create a monthly budget, review your debt obligations to see how you can contribute a little more money each month to reduce debt.
If you get one concept out of this article, it should be that the lower your debt, the higher your credit score.
Review Your Credit Reports
I bet that you review at least once per month the checks you write, the credit card purchases you make, and the ATM transactions you perform. Nice job, because you’re managing your debt. However, do you review your credit reports? The three major credit bureaus occasionally make errors that cost you credit score points. Some merchants forget to report payments. The Fair Credit Reporting ACT (FCRA) mandates that each of the three major credit bureaus (Experian, Equifax, and Trans Union) provide you with one free credit report every 12 months. One of the best times to request the free credit reports occurs right after the holidays, when you have used credit cards to make most of your gift purchases.
Making timely bill payments, keeping available credit below 30% of the credit limit, and paying more than what you owe provide you with a solid foundation to keep a healthy credit score. Just make sure to limit the number of hard credit inquiries, as well as stay on top of your debt and credit reports to verify your healthy credit standing.